2009 Tax Filing Season: IRS Met Many 2009 Goals, but Telephone Access Remained Low, and Taxpayer Service and Enforcement Could Be Improved
Published: 2009-12-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service's (IRS) filing season is an enormous undertaking that includes processing tax returns, issuing refunds, and responding to taxpayer questions. IRS's efforts to ensure compliance begin during the filing season. GAO was asked to assess IRS's 2009 filing season performance, identify ways to reduce taxpayers' use of short-term, high-interest refund anticipation loans (RAL) offered by paid preparers or banks, and identify ways to enhance compliance during processing. GAO analyzed IRS performance data, reviewed IRS operations, interviewed IRS officials, and reviewed its compliance programs and relevant statutes.
section_title: What GAO Found
paragraphs: IRS processed 139 million returns and issued $298 billion in refunds as of October 2, 2009. Electronic filing, which provides IRS with significant cost savings and taxpayers with faster refunds, increased to 68 percent of all returns filed. While taxpayers' access to telephone assistors was better than last year, it remained lower than in 2007 in part because of calls about tax law changes. Compared to 2005 through 2007, IRS reduced its goal for assistor answered calls in 2009 and set its 2010 goal at 71 percent. Despite heavy call volume, the accuracy of IRS responses to taxpayers' questions remained above 90 percent. IRS started a major data collection effort on why taxpayers call, but lacks a plan to analyze the data and improve telephone service. According to IRS, issuing refunds faster reduces taxpayers' use of RALs, high-interest loans made by paid tax preparers or banks in anticipation of a refund. Issuing refunds is a joint effort by IRS, Treasury's Financial Management Service, which checks for non-tax debt owed to the federal government, and the Automated Clearing House, which distributes funds. However, IRS has not coordinated extensively with them to expedite refunds. Further, IRS has not studied the use of debit cards for unbanked taxpayers, which could also reduce taxpayers' use of RALs by providing faster and more secure refunds. IRS automatically identifies and corrects select types of errors while processing tax returns. It could also correct tax returns that claim the Hope credit, a tax credit to help offset qualified education expenses, for longer than the number of years allowed. However, IRS lacks the authority to use prior years' tax return information for this purpose. Also, information reported by education institutions to taxpayers and IRS about qualifying educational expenses on the Form 1098-T is confusing for taxpayers and not useful for IRS. Many institutions report the total amount billed to students, but not what is actually paid after taking into account scholarships and grants. This results in some taxpayers under-claiming benefits, while others over-claim. Finally, because Form 1098-T can show the amount billed, which may not be the amount paid, IRS is unable to use the information to automatically verify taxpayers' claims for the credit through its computerized matching program.

section_title: Letter
paragraphs: The Internal Revenue Service’s (IRS) 2009 filing season is an enormous  and critical undertaking. Last filing season, IRS processed over 140  million individual income tax returns and issued over 100 million refunds.  IRS also answered tens of millions of taxpayer questions through  telephone, Web site, and face-to-face assistance. During each of the last  two filing seasons, IRS has been called upon to quickly implement  complex tax law changes, including economic stimulus policies that have  resulted in unexpected increases in call volume and created new taxpayer  compliance challenges and workload.
IRS’s filing season performance also has indirect effects on taxpayers. For  example, timely issuance of refunds can reduce taxpayer demand for  refund anticipation loans (RAL), which are short-term, often high-interest  loans offered by tax preparers or banks that allow taxpayers to receive  their refund cash quickly, sometimes within the same day. The filing  season is also the time IRS begins its enforcement efforts with its math  error program, in which IRS uses its computers to identify errors during  processing, such as calculation mistakes or omitted or inconsistent  entries. Where IRS has the statutory authority, also known as math error  authority (MEA), it corrects certain errors before interest is owed by  taxpayers, and helps taxpayers and IRS avoid burdensome audits.
Earlier this year, we provided an interim assessment of IRS’s 2009 filing  season performance, made recommendations to improve IRS’s 2010 filing  season performance, and made suggestions to Congress to better ensure  compliance, when tax returns are being processed, with the first-time  homebuyer tax credit. In light of its importance, the Chair and Ranking  Member of Subcommittee on Oversight, Committee on Ways and Means,  House of Representatives, and the Chair and Ranking Members of the  Senate Finance Committee asked us to provide an overall assessment of  IRS’s 2009 filing season performance. For this report, our objectives were  to  1.  assess IRS’s filing season performance compared to 2009 goals and  2.  3. prior years’ performance;  identify opportunities for IRS to reduce taxpayers’ reliance on RALs  and Refund Anticipation Checks (RAC); and   identify opportunities, based on prior GAO reports such as those on  higher education tax benefits, for IRS to enhance taxpayer compliance  during returns processing.
subsections: section_title: Scope and Methodology
paragraphs: To meet our three objectives, we took the following steps.
Reviewed and analyzed IRS reports, testimonies, budget submissions,  and other documents and data, including performance and workload  data, and compared these to IRS’s goals and past performance to  identify trends and anomalies in performance. We also tested for  statistically significant differences between annual performance rates  based on IRS sample data.
Observed operations at the Joint Operations Center (which manages  IRS’s telephone services) and IRS’s walk-in sites in Atlanta, Ga. and  Baltimore, Md. and a volunteer site in Washington, D.C. We selected  these particular offices for a variety of reasons, including the location  of key IRS managers;    Analyzed staffing data for paper and electronic filing, telephone  assistance, and walk-in assistance.
Reviewed information from other organizations who compile  information pertinent to our objective, such as Keynote Systems, which  evaluates Internet performance.
Reviewed IRS reports and analyzed IRS data on RALs and RACs to  identify trends and opportunities to reduce taxpayers’ reliance on  them.
Reviewed IRS data and analyzed methods IRS currently employs to  identify taxpayer compliance with eligibility requirement for higher  education tax benefits.
Reviewed MEA-related statutes to determine IRS’s existing and  possible new authorities.  Interviewed IRS officials about current operations, trends, and  significant factors and initiatives that affected performance; efforts to  reduce reliance on RALs and RACs; and monitoring and oversight of  compliance issues, including higher education credit claims.  Interviewed representatives of some of the larger private and nonprofit  organizations that prepare tax returns, including H&R Block and trade  organizations that represent both individual paid preparers, tax  preparation companies, and professional associations, including the  American Institute of Certified Public Accountants.
Reviewed Treasury Inspector General for Tax Administration (TIGTA)  reports and interviewed a TIGTA official about IRS’s performance and  initiatives.
Reviewed prior GAO reports and followed up on our recommendations  made in filing season and related reports.
This report discusses numerous filing season performance measures and  data covering the quality, accessibility, and timeliness of IRS’s services  that, based on our prior work, we consider sufficiently objective and  reliable for purposes of this report. To the extent possible, we  corroborated information from interviews with documentation and data  and where not possible, we attribute the information to IRS officials in our  report. We reviewed IRS documentation, interviewed IRS officials about  computer systems and data limitations, and compared those results to our  standards of data reliability. Data limitations are discussed where  appropriate. Finally, we conducted our work primarily at IRS headquarters  including at the Small Business/Self-Employed Division in Washington,  D.C., and the Wage and Investment Division headquarters in Atlanta, Ga.  as well as the other sites mentioned earlier.  We conducted this  performance audit from January 2009 through December 2009 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.
We received technical and written comments on a draft of this report,  which we addressed. A letter from the IRS Deputy Commissioner for  Services and Enforcement providing those comments is reprinted in  appendix I. In that letter, the Deputy Commissioner explicitly agreed with  five of our recommendations and described the steps IRS is taking with  respect to our two other recommendations.
section_title: Background
paragraphs: Most taxpayers file their individual income tax returns electronically,  although millions still mail paper returns. Compared to paper, electronic  filing allows taxpayers to receive refunds faster, is less prone to  transcription and other errors, and provides IRS with significant cost  savings. Last year we reported that IRS estimated it used 39 percent fewer  staff years for processing tax returns in 2007 than in 1999 for a savings of  $85 million.
The Free File program provides taxpayers below an income ceiling  with access to a consortium of tax preparation companies that offer  free on-line tax preparation and filing services for qualifying taxpayers.
CADE, part of IRS’s high-risk Business System Modernization program  (BSM), is intended to eventually replace IRS’s antiquated Master File  legacy processing system and facilitate faster refund processing and  provide IRS with more up-to-date account information.
Primarily through its telephone, Web site, and, to a much lesser extent,  through its face-to-face assistance, IRS also provides tax law and account  assistance, limited return preparation, tax forms and publications, and  outreach and education.
IRS staff provides assistance at 401 walk-in sites where taxpayers can  receive basic tax law assistance, receive assistance with their accounts,  and have returns prepared by IRS if their annual income is $42,000 or  less.  IRS also has volunteer partners that staff over 12,000 sites, which help  serve traditionally underserved taxpayer segments, including elderly,  low-income, and disabled taxpayers, and taxpayers with limited  English proficiency.
IRS developed the Taxpayer Assistance Blueprint (TAB), a 5-year plan  designed to assist the agency in providing, evaluating, and improving  taxpayer services at lower cost. TAB also provided estimates of the cost- per-service contact for different types of taxpayer services and conducted  preliminary research about the effect of taxpayer service on compliance.  IRS delivered an update of TAB to Congress in October  2009.
Millions of taxpayers who do not want to wait for their tax refunds from  IRS choose to obtain RALs, which are offered by paid preparers or banks  to taxpayers in connection with federal and/or state tax refunds.
RALs are short-term, high interest rate bank loans. We found that the  annual percentage rate on RALs can be over 500 percent, RALs offer  taxpayers the benefit of receiving cash quickly based on an expected  refund. Combined with tax preparation fees, RALs may considerably  reduce a taxpayer’s refund. However, RALs remain popular, especially  among low-income taxpayers.
RAL providers might also offer RACs, which are not loans, but instead  are a refund delivery option where IRS direct deposits a refund into a  temporary account set up by a financial institution, which withdraws  the tax return preparation fee, and then makes the remaining funds  available to the taxpayer. RALs and RACs allow taxpayers to pay return  preparation and fees out of their refunds.
IRS uses its many tools to identify and correct noncompliance, whether  intentional or unintentional.
Over the years, Congress granted IRS statutory authority to cover  specific areas so that the agency could correct tax return errors during  processing, including calculation errors and entries that are  inconsistent or exceed statutory limits, without having to issue the  taxpayer a statutory notice of deficiency (see app. II for details). Math  error checks are automated and low-cost relative to audits. Prompt  compliance checks, such as math error checks, increase the likelihood  of IRS collecting all or part of the amount owed. However, IRS must  be granted MEA from Congress by statute for specific purposes, and as  noted above, we recently suggested areas where IRS could benefit from  new authorities.  IRS gets most of the information returns during the filing season. These  returns are provided by third parties, such as employers, banks, or  educational institutions, file returns with IRS and taxpayers that  provide information on a variety of taxpayer transactions. IRS tries to  match information from the information returns filed by third parties  against taxpayers’ income tax returns to see if taxpayers have filed  returns and reported their income and expenses. This approach tends  to lead to high levels of taxpayer compliance.
section_title: Access to Telephone Assistors Remained Low, and IRS Has a Limited Understanding of Why Taxpayers Call and Has Not Clearly Integrated TAB into Its Planning Documents
paragraphs: As of October 2, 2009, IRS processed 139 million individual income tax  returns. As shown in table 1, 94 million taxpayers (68 percent)  electronically filed their returns compared to 88 million (62 percent) last  year, excluding the 9 million stimulus-only returns. Electronic filing  provides IRS with significant cost savings—IRS estimates the cost savings  of electronic filing to be $2.71 per return over the costs in 2008. It helps  taxpayers to receive their refunds faster and aids IRS in achieving the  electronic filing goal of having 80 percent of all federal tax and  information returns filed electronically by 2012. IRS issued approximately  109 million refunds, up 4 million from last year, for $298 billion.  Approximately 66 percent of all refunds were directly deposited, 9 percent  more than last year. This increase is important, because direct deposit is  faster, more convenient for taxpayers, and less expensive for IRS than  mailing paper checks.
IRS attributes the increase in electronic filing, in part, to a 19 percent  increase in people filing from home computers, which may be related to  the elimination of separate fees for electronic filing. According to IRS, the  elimination of fees by some paid preparers also contributed to the decline  in the Free File program—as of September 20, 2009, the number of  taxpayers who filed through Free File decreased to 3 million, down 37  percent from last year. IRS also attributed part of the decrease to the  migration of taxpayers to other free offers in the marketplace. The Free  File program offered a new option this year, fillable forms, that allow   taxpayers to download forms from IRS and fill them in on a home  computer without using tax preparation software. About 270,000  taxpayers used this option.
Finally, IRS met or exceeded its goals for six out of eight of the processing  measures (see app. II for details). For example, IRS exceeded its goals for  refund timeliness, and deposit timeliness and accuracy. The one measure  where performance was significantly below IRS’s goal and last year’s level  was the correspondence error rate, which is the percentage of incorrect  notices and letters issued to taxpayers. According to IRS officials, this  resulted from a high number of erroneous notices sent to taxpayers during  the filing season related to the recovery rebate credit. In our interim  report, we noted that millions of tax returns had these types of errors,  which resulted in a delay in refund timeliness from 1 day to a week. IRS  took actions to address the errors, including developing an automated tool  to correct the errors more quickly.
subsections: section_title: Work to Increase CADE Functionality Has Been Suspended While IRS Develops a New Strategy for Modernizing Taxpayer Accounts
paragraphs: IRS’s CADE processed 40 million tax returns and 35 million refunds worth  $59 billion. This accounts for about 29 percent of all returns processed.  CADE processes returns and refunds between 1 and 8 days faster than  legacy systems. Additionally, for the first time this year, CADE processed  returns with payments to IRS—7 million returns with payments of $9  billion.
After over 5 years and $400 million, CADE is only processing about 15  percent of the functionality originally planned for completion by 2012. In  addition, each successive release of the system was expected to process  more complex returns and several technical challenges had not been  addressed. Given this, IRS estimated that full implementation of CADE  would not be achieved until at least 2018 or possibly as late as 2028. As a  consequence, IRS decided to stop development of new CADE functionality  and rethink its strategy for modernizing individual taxpayer accounts to  determine whether an alternative approach could deliver improvements  sooner. IRS also stopped its plans for adding new functionality to a CADE- related system that allows its telephone assistors to access and work with  taxpayer accounts. According to IRS officials, the need to enhance  computer security and the availability of new technologies also influenced  the decision to rethink the CADE strategy.
Stopping CADE development has trade-offs in that IRS will not be able to  materially increase the number of returns processed on CADE during the  2010 filing season, which, in turn, means that the number of taxpayers  benefiting from faster refund processing will not increase.
On the other hand, IRS’s new strategy for modernizing individual taxpayer  accounts is intended to address the risks and challenges of the initial  approach. Importantly, IRS officials responsible for implementing this new  strategy told us that they expect to provide all taxpayers with faster refund  processing by the 2012 filing season. IRS plans to do this by continuing  daily processing of the roughly 40 million taxpayer accounts currently on  CADE while converting the legacy Individual Master File system from  weekly to daily processing for the roughly 100 million remaining accounts.  IRS also plans to develop a new database that would be the single  authoritative source of taxpayer account information and use the new  database for daily processing by 2014.
IRS established a program management office to guide the implementation  of the new strategy and developed a preliminary road map and high-level  cost estimates for the effort. It also defined the overall business benefits  the strategy is expected to provide. IRS officials also stated that they are  working on a more detailed plan for the strategy, including milestones,  deliverables, and detailed costs for the first phase of the strategy and  expect to have them completed in December. These documents as well as  plans for fully implementing the new strategy are critical to justifying IRS’s  change in direction and we plan to evaluate them as part of the review of  IRS’s fiscal year 2010 Business Systems Modernization expenditure plan,  which we recently initiated.
section_title: Access to Telephone Assistors Remained Low for the Second Year in a Row and IRS Decreased Its 2010 Access Goal
paragraphs: As shown in table 3, taxpayers’ access to IRS’s telephone assistors was  better than last year, but was below IRS’s original goal for 2009 and  remains well below 2005 through 2007 performance.
IRS reduced its 2009 goal for providing assistor services from the goals for  2005 through 2008, as shown in table 3. IRS initially set the fiscal year 2009  goal for the percentage of taxpayers seeking assistor service who actually  received it at 77 percent. Perhaps more importantly, IRS reduced the goal  for 2010 to 71 percent. According to IRS officials, the goals were reduced  because of resource trade-offs related to call volume increases starting in  2008.
As shown in table 4, IRS’s call volume in 2008 and 2009 was substantially  higher than in prior years. Although IRS received 40 million fewer calls in  2009 than in 2008, the volume was still well above earlier years. While  IRS’s automated call systems answered an increasing number of calls, the  number of calls abandoned by taxpayers, busy signals, and calls  disconnected by IRS also went up substantially. This may have limited  many taxpayers from reaching IRS assistors with questions.
IRS attributed the heavier-than-anticipated call volume in part due to  stimulus-related questions and taxpayers needing authentication  information. Taxpayers had to provide their last year’s adjusted gross  income (AGI) or personal identification number (PIN) to authenticate  their identity in order to electronically file. Taxpayers who did not know  their AGI or PIN and tried to get it from IRS had to call an assistor or visit  an IRS walk-in site. While IRS took actions to minimize the effect of these  calls, heavy volume continued through the filing season. According to IRS,  its assistors answered 3 million calls from taxpayers needing their AGI,  nearly 10 percent of all assistor calls, at a cost of $36 million through June  2009.
We recently reported that IRS is developing an automated Web and phone  application to provide taxpayers with authentication information for  electronic filing in the 2010 filing season. In that report, we also made  recommendations to improve telephone service by reducing the volume of  telephone calls, which could improve taxpayer access to IRS assistors. For  example, in addition to recommending ways to reduce the number of  rejected returns, which often lead to taxpayers calling IRS, we  recommended that IRS develop a low-cost automated method to respond  to taxpayer questions about volunteer site locations and hours of  operation. IRS is in the process of addressing those recommendations.
Despite the heavy call volume, the accuracy of the telephone assistors’  responses to tax law and account questions was higher by a statistically  significant amount compared to the same period last year and exceeded  IRS’s fiscal year 2009 goals (see table 5). Since 2005, IRS has maintained a  level of accuracy of about 90 percent or more. According to IRS officials,  the high accuracy is due to training and the introduction of new tools,  particularly the Interactive Tax Law Assistant (ITLA), which is a Web- based probe and response guide to help assistors provide more accurate  and consistent responses to specific tax law questions.
IRS has limited information on why taxpayers call to speak IRS assistors.  To help obtain better information on why taxpayers call, IRS recently  implemented a major data collection effort called Contact Analytics at all  its 26 call sites. According to IRS, Contact Analytics is a significant  investment that will allow IRS to search recorded telephone interactions  between taxpayers and IRS assistors for key words or phrases. It is  intended to improve service by providing IRS with a research tool to better  understand why taxpayers are calling and take corrective action if  necessary as well as identify areas to reduce costs, such as identifying  calls that can be moved to self-service.
However, the agency does not have a comprehensive and detailed analysis  plan for effectively using Contact Analytics data to determine how to  improve taxpayer service or reduce costs. According to IRS officials,  because Contact Analytics is a new program and data is only beginning to  be collected, IRS has not yet considered a plan to analyze the data  produced by the program. IRS officials recently indicated that now that  Contact Analytics has been implemented, they intend to eventually  develop an analysis plan. However, a standard approach for major data  collection efforts is to develop a research plan before data collection  begins. Such a plan helps ensure that necessary data is collected and that  resources are not wasted collecting information that will not be needed.  Now that IRS is actually collecting the data, the lack of a research plan  delays the time when improvements to taxpayer service, based on the  results of the research, could be implemented. Having a comprehensive  and detailed analysis plan that includes, for example, a research design,  dissemination of results, and involvement of relevant stakeholders,  provides a number of benefits, perhaps most importantly, increasing the  likelihood that the analysis will yield methodologically sound results,  thereby supporting effective policy decisions.
While many taxpayers require service from live assistors, diverting calls to  automated services is also important because of the costs involved—IRS  assistors answered about 26 million calls between January 1, 2009 and  June 30, 2009 at a cost of $25.75 per call, for a total of $670 million. Also,  taxpayers would benefit from reduced wait times and having the capability  to obtain information immediately and without having to speak to an  assistor.
section_title: IRS Added Features to Its Web Site that Potentially Diverted Calls
paragraphs: IRS continues to launch new features on its Web site to provide better  access to information and reduce taxpayer burden, including  the “How Much Was My 2008 Stimulus Payment” application and the  recovery rebate check calculator that used the economic stimulus  payment amount from 2008 along with several other factors to  determine eligibility for recovery rebate credit and the appropriate  amount to claim;  the Online Payment Agreement application that provides taxpayers  with an online, interactive payment agreement process that reduces the  need for contact with an assistor and eliminates paper processing.    a “What if” page on IRS.gov that describes different scenarios for  taxpayers on the possible impact of, for example, loss of job or house,  on the taxpayers ability to pay taxes; and  information on the new tax credits provided in the Recovery Act with  details on, for example, claiming the first-time homebuyer credit and  tax breaks for vehicle purchases.
As table 6 shows, compared to before 2008, visits to IRS’s Web site are  substantially higher than in the last 4 years with the exception of 2008. The  year 2008 was anomalous, in part, because of the high number of visits to  stimulus-related features on IRS’s Web site in 2008.
One measure of the quality of IRS’s Web site is its ranking in the Keynote  Systems top 40 government Web sites. During each week of the 2009 filing  season, IRS ranked fourth and fifth in response time out of the top 40  government Web sites in the Keynote Government Index weekly ratings,  compared to ranging between first or second last filing season.
Finally, IRS is working on a Web portal strategy to expand taxpayers’  access to self-assistance tools for account and tax law issues. Both the  TAB and IRS’s 2009-2013 strategic plan focus on enhancing features on  IRS’s Web site.
section_title: IRS Improved Its Ability to Assess the Quality of Assistance at Volunteer Sites and Accuracy Improved at IRS’s Walk-in Sites
paragraphs: As of June 28, 2009, IRS’s volunteer partners prepared 3 million tax  returns, a slight increase of 1 percent over last year. IRS provides training  and certification for volunteer staff to help ensure quality. However,  assessing the quality of assistance at volunteer sites is a challenge for IRS  because of the large number of volunteer sites and staff providing return  assistance. IRS officials stated that the agency partnered with community- based organizations to run 12,160 sites in 2009, 320 sites more than last  year, staffed with nearly 83,000 volunteers.
Despite these challenges, IRS conducted several types of quality reviews,  including site and tax return reviews as well as mystery shopping reviews  in both 2008 and 2009. For 2009, IRS combined site and return reviews  into its Quality Statistical Sample (QSS) reviews. According to IRS  officials, QSS reviews were based on a statistically valid sample of sites.  IRS reported that it collected data from 240 site reviews and 679 return  reviews, generally reviewing 3 tax returns per site visit. As of mid-April,  return preparation accuracy was 78 percent. In contrast, IRS’s mystery  shopping reviews resulted in a 68 percent accuracy rate. However, IRS  officials stated that the QSS reviews are statistically valid and, therefore,  provide a better overall assessment of return accuracy than mystery  shopping. Consequently, IRS officials reported they will not conduct  mystery shopping in 2010.
While we acknowledge that the QSS reviews represent an important  advancement in IRS’s assessment of the accuracy of return assistance at  volunteer sites, it is important to consider how the data are collected and  how the results will be used. The results of the QSS return reviews could  be biased because of volunteers’ awareness of the presence of IRS  officials. According to IRS officials, since site visits were unannounced,  volunteer staff may have been unaware of IRS’s presence while observing  the first return, but were likely to have noticed IRS’s presence by the  second and third return. As a result, volunteers could be more quality  conscious while preparing the later returns, adhering to the quality  process encouraged by IRS more than they might have been otherwise.  IRS officials stated that they understand the limitations of how the results  were obtained.
In contrast to a slight increase at volunteer sites, as of April 30, 2009, the  total number of taxpayers’ contacts at IRS’s 401 walk-in sites was 2.7  million, down 12 percent compared to previous year. Further, as of June  30, 2009,  the accuracy of account assistance improved to 88 percent compared  to 83 percent last year, and  the accuracy of tax law assistance also improved to 76 percent from 67  percent last year. According to IRS officials, this increase is due in  large part to management’s focus on the consistent use of IRS tools  available to assistors. They identified IRS’s ITLA in particular, for the  increase in accuracy in tax law and return assistance, which is used by  both IRS’s telephone and walk-in site assistors to provide more  accurate and consistent answers to taxpayers’ questions. While IRS  officials acknowledged that using ITLA may take longer to get the  answer, assistors properly using the tool will provide the right  answer(s) to customer specific tax law questions more often than when  ITLA is not used.
section_title: The Relationship between TAB and IRS’s Budget and Strategic Plan Is Not Clear
paragraphs: TAB is IRS’s 5-year strategic plan for improving service to taxpayers and  helping guide the agency’s budget and resource allocation decisions.  However, the linkage between TAB and the 2010 budget request for IRS or  IRS’s agency wide 2009–2013 strategic plan is not clear. TAB is mentioned  once in the budget document and not at all in IRS’s strategic plan. This  lack of transparency obscures the link between TAB and IRS’s overall  strategic plan and budget. IRS officials acknowledged that while TAB is  not specifically included and integrated in IRS’s budget and other planning  documents, IRS considers TAB to be a guiding principle.
According to the Office of Management and Budget and our own work, it  is important to link general goals communicated in strategic plans with  cross-cutting initiatives, such as those listed in TAB because they work  together to form a budget and implementation framework. Without more  explicit connections between TAB and IRS’s planning documents,  Congress and other stakeholders may not be able to understand the  priority that IRS places on improving taxpayer service.
section_title: RAL Usage Declined in 2009 and IRS Could Further Reduce Usage by Issuing Faster Refunds
paragraphs: According to IRS, depending on the tax refund amount, RAL and RAC fees  may range from $39 to over $600, which includes the account set-up fee,  tax preparation, and interest. In a recent report, we noted that these  charges may amount to an annual percentage interest rate of over 500  percent. IRS officials told us that IRS’s continued efforts to reduce RALs  and RACs focus on increasing electronic filing with direct deposit, and  improving refund timeliness.
Table 7 shows that 8 million taxpayers applied for RALs from banks or  other financial institutions, a decline of 20 percent compared to last year.
One reason for this decline may have been reluctance by some lenders to  offer RALs early in the filing season due to taxpayer errors related to  recovery rebate credit claims. Because taxpayer’s anticipated refund is  the collateral for a RAL, lenders could not be certain the collateral existed  when many refund claims were in error. In contrast, the number of RAC  requests increased by 10 percent to 11 million. RACs are less risky for the  return preparer because the taxpayer receives no money until the preparer  receives the refund and deducts associated fees.
IRS’s 2006 RAL report to Congress provides valuable information on  taxpayer use of RALs and RACs,    benefits of improving refund timeliness on reducing taxpayers’ reliance  on RALs and RACs,  the cost associated with RALs and RACs, and  information on RAL alternatives offered by both IRS and tax  preparers.
However, IRS has not released this report to the public nor has IRS  updated it. Further, according to IRS officials, there is no requirement to  do so. By not public releasing and updating the report, IRS is missing an  opportunity to provide Congress and taxpayers with important  information on how tax law changes, such as the economic stimulus  package, might have affected taxpayers’ reliance on RALs and RACs and  potentially reduce taxpayers’ reliance on them.
subsections: section_title: IRS and Other Entities Share Responsibility for Issuing Refunds, and More Could Be Done to Improve Refund Timeliness
paragraphs: Most refunds are claimed on electronically filed returns and then  electronically deposited because taxpayers and preparers know that  electronic filing and depositing speeds up refund processing. Refunds take  5 to 15 days, as shown in figure 1. Figure 1 also shows that  refund processing time varies by day of the week and is shorter for  refunds processed on CADE than on IRS’s legacy individual master file,  three entities--IRS, Treasury’s Financial Management Service (FMS)  and Automated Clearing House (ACH)—share responsibility for issuing  refunds (see table 8 below). IRS runs pre-refund tax law compliance  checks, FMS checks for non tax debt owed to the federal government,  and ACH distributes the funds.  IRS accounts for a varying proportion of the total processing time. In a  number of cases, IRS accounts for less than half the time it takes to  process and issue a refund.
Improving refund timeliness is a goal of IRS, with the effort focused on  shifting tax return processing to CADE. Figure 1 suggests that another  approach would be to try to reduce the time taken by the other two  entities involved in issuing refunds, particularly ACH. While IRS officials  reported that they meet at least annually with FMS officials to discuss  issues related to refunds and communicate intermittently to address issues  as needed, they also said that they have not aggressively explored with the  other two entities whether opportunities exist to shorten refund  processing time. This is a timely issue because as IRS has shifted 40 million of tax returns to CADE, t he IRS proportion of overall refund  processing time has decreased.
section_title: IRS Has Not Studied the Use of Debit Cards for Unbanked Taxpayers
paragraphs: While IRS offers paper check and direct deposit options for delivering  refunds to taxpayers, it has not studied the feasibility of distributing  refunds electronically through debit cards. Further, IRS has not  determined the costs of issuing debit cards nor the benefit for taxpayers.  Although tens of millions of taxpayers receive paper checks, they are less  secure than electronic distribution of benefits. Further, many unbanked  taxpayers may not have the benefit of faster refunds associated with direct  deposit and, instead, receive their tax refund by checks, often incurring  transaction costs, such as check cashing fees.
Debit card programs are well established in a variety of state and federal  government programs. For example, FMS’s Direct Express debit cards  allow beneficiaries to receive their benefits as quickly as direct deposit  while avoiding transaction fees associated with receiving check payments.  Similarly, debit cards could provide taxpayers with a low- or no-cost  refund option for receiving refunds quickly. According to a recent survey  conducted by TIGTA, 63 percent of RAL applicants indicated a preference  for receiving a debit card from IRS instead of purchasing a RAL. Finally, in  its RAL report to Congress, IRS noted that transitioning unbanked  taxpayers to debit cards would allow them to receive their refund in the  same amount of time as taxpayers that have direct deposit.
Without researching the benefits and costs of debit cards, IRS does not  know whether direct distribution of cards is a viable option to distribute  refunds, improve refund timeliness and reduce taxpayer reliance on RALs,  and provide electronic payment options for unbanked taxpayers.
We have previously reported that Treasury’s role as the federal  government’s leader for payments and its experience with electronic  payment methods suggests that it could provide valuable information and  assistance to IRS, particularly when working with other entities to  improve service. However, without aggressively collaborating with FMS  and ACH to improve refund timeliness and explore other refund options,  IRS may be missing an opportunity to further reduce the time taxpayers  wait for refunds and taxpayers’ reliance on RALs.
section_title: During Returns Processing IRS Could Reduce Taxpayer Confusion and Better Ensure Compliance with Higher Education Tax Benefits
paragraphs: We identified higher education tax benefits as one area where an  expansion of MEA and revisions to information returns might reduce  taxpayer confusion and increase compliance (see app. V). Millions of  taxpayers claim the Hope and Lifetime Learning tax credits to offset  qualified education expenses. However, these tax provisions are  complicated and may lead taxpayers to under claim benefits or  unknowingly claim more benefits than they are entitled to claim.
IRS faces challenges ensuring compliance with the eligibility requirements  of the higher education credits. IRS relies on audits and limited MEA to  ensure compliance. However, audits may not be an efficient method for  enforcement in this case. Audits are labor intensive, and therefore costly,  for IRS. According to IRS officials, the maximum amount most taxpayers  can claim per student each year—$1,800 per student for the Hope credit  and $2,000 per return for the Lifetime learning credit for tax year 2008— may not yield sufficient revenue to justify expanded enforcement.  Because of the relatively high costs and small revenue gain, IRS does  relatively few audits of the millions of education credit claims.
IRS has MEA to verify compliance with some of the higher education  credit eligibility requirements. However, IRS lacks the statutory authority  to use MEA to verify compliance with the limit on the number of years that  taxpayers can claim the Hope credit. If IRS had authority to use  information from prior years’ returns to check taxpayers’ eligibility, it  could correct claims during processing, before refunds are issued, and  enhance compliance.
Eligible educational institutions are required to report information on  qualified expenses for higher education to both taxpayers and IRS so that  taxpayers can determine the amount of educational tax benefits that can  be claimed (see app. V). However, the information currently reported by  educational institutions on tuition statements sent to IRS and taxpayers  (on Form 1098-T) may be confusing for taxpayers who use the form to  prepare their tax returns and not very useful to IRS.
IRS requires institutions to report on Form 1098-T either the (1) amount of  payments received, or (2) amount billed for qualified expenses. IRS  officials stated that most institutions report the amount billed and do not  report payments. However, the amount billed may not equal the amount  that can be claimed as a credit. For example, the amount billed may not  account for all scholarships or grants the student received. In such cases,  the Form 1098-T may overstate the amount that can be claimed as a credit,  confusing taxpayers. Conversely, if institutions are not providing  information on other eligible items, such as books or equipment, taxpayers  might be understating their claims.
In addition to confusing taxpayers, the existing Form 1098-T is not very  useful to IRS in its enforcement efforts. According to IRS officials, because  the amount billed may not be the amount taxpayers are eligible to claim as  a credit, IRS does not compare tuition statement information to the  information reported on a tax return. IRS officials stated that a change in  legislation, which TIGTA recommended in a recent report, would be  needed to require institutions to report only the amount paid. However,  IRS does not currently use some of the more basic information from the  tuition statement to verify eligibility for the credit. For example, a tuition  statement includes the student’s SSN that could be matched to tax return  information. Additionally, IRS does not use the location of the institution  to determine whether it is located in a federal disaster area, which  substantially increases the amount of the eligible credit. Using IRS’s  compliance computer matching systems to automatically compare  information on statements to taxpayers’ claims could be a low-cost  enforcement tool for IRS to verify certain aspects taxpayers’ eligibility for  of the credit.
While changing the requirements for how higher education institutions  report qualified expenses on tuition statements would likely impose some  burden on those institutions, the additional burden could be low because  the institutions are already required to fill out Form 1098-T. Further, this  form could be revised to more clearly provide additional information  about qualified expenses, such as for books, supplies, and equipment— information institutions might already collect—and potentially reduce  taxpayer confusion and noncompliance.
section_title: Conclusions
paragraphs: IRS met many of its 2009 filing season goals. The major exception was  telephone service, where, for a second year in a row, unanticipated  increases in call volume significantly reduced performance, in part,  because of inquires related to tax law changes. However, IRS does not  have a research plan for conducting analyses of its telephone contacts that  could identify areas for more automated services. The declines in  telephone performance also highlight the importance of TAB, which is  intended to provide the strategy for improving service to taxpayers, and  how TAB is integral to IRS’s overall strategic plan.
Millions of taxpayers continue to use expensive RALs and RACs. By not  coordinating more closely with FMS and ACH, IRS may be missing  opportunities to improve refund timeliness and expand options for refund  delivery, both of which might reduce taxpayers’ demand for RALs and  RACs. Further, by not updating its RAL report and studying the feasibility  of debit card options, IRS may be missing other opportunities to reduce  the transaction costs imposed on taxpayers, particularly low income  taxpayers, when they receive tax refund payments.
Finally, steps could be taken by Congress to provide IRS with the statutory  authority to automatically verify some aspects of higher education credits  claims and by IRS to improve and better utilize information reported by  higher education institutions. Without such steps, taxpayers may remain  confused by the information reported to them, and IRS will not make use  of some low-cost, less intrusive tools for helping ensure compliance.
section_title: Matters for Congressional Consideration
paragraphs: Congress should consider providing IRS with MEA to use prior years’ tax  return information to automatically verify taxpayers’ compliance with the  limit on the number of years the Hope credit can be claimed.
section_title: Recommendations for Executive Action
paragraphs: Related to improving IRS’s performance during the filing season, the  Commissioner of Internal Revenue should    Develop as soon as possible an analysis plan for using the data IRS  captures through Contact Analytics; and    Explicitly integrate the TAB in strategic planning documents.
To further improve refund timeliness and reduce reliance on RALs and  RACs, IRS should    Update and publicly release a report on RAL and RAC use;    Work more proactively with FMS and ACH to help improve refund    Determine the feasibility of offering debit cards for refunds.
To reduce taxpayer confusion and enhance compliance with the eligibility  requirements for higher education benefits, IRS should   Determine the feasibility of using current information reported on  Form 1098-T, such as school location and taxpayer identification  number or SSN, in IRS’s compliance programs; and    Revise Form 1098-T to improve the usefulness of information on  qualifying education expenses.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report (which are reprinted in  appendix I), the IRS Deputy Commissioner for Services and Enforcement  explicitly agreed with five of our recommendations and described the  steps IRS is taking with respect to our two other recommendations.  IRS  officials also provided technical comments which we incorporated as  appropriate.
IRS agreed to develop a comprehensive and detailed evaluation plan for  Contact Analytics, work to define the scope and objectives for potentially  updating and releasing a RAL/RAC report, and work with FMS and ACH to  improve refund timeliness. IRS also agreed to consider the feasibility of  using current information on Form 1098T in its compliance programs, and  develop a plan to address possible changes to that form.
With respect to our recommendation to explicitly integrate TAB in  strategic planning documents, the Deputy Commissioner said that  although they are not repeated verbatim in IRS’s Strategic Plan, TAB’s  guiding principles resonate throughout the document. We acknowledged  IRS’s position in making our finding and recommendation. However, TAB  is not mentioned once by name in IRS’s strategic plan.  Without an explicit  and transparent connection between TAB and IRS’s other planning  documents, Congress and other stakeholders may not be able to  understand the priority that IRS is giving to improving taxpayer service.
Concerning our recommendation to determine the feasibility of offering a  debit card option for refunds, the Deputy Commissioner said that the  agency is exploring options for debit card use including an option to  provide debit cards directly. Because the Deputy Commissioner’s letter  does not provide any detail on what exploring options means, we want to  reiterate the basis for our recommendation.  A small debit card pilot  program was conducted at several volunteer sites around the country, but  that pilot did not provide information on the benefits or costs of IRS  issuing debit cards directly.  Given the large number of unbanked  taxpayers, we believe IRS should determine the feasibility of directly  issuing debit cards.
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. The report also will  be available at no charge on the GAO Web site at http://www.gao.gov.  If  you or your staff have any questions or wish to discuss the material in this  report further, please contact me at (202) 512-9110 or at whitej@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. GAO staff who made  contributions are listed in appendix VI.
section_title: Appendix I: Comments from the Internal Revenue Service
section_title: Appendix II: IRS’s Existing and Suggested Math Error Authority for Enhancing Compliance
paragraphs: Table 8 below summarizes the Internal Revenue Service’s (IRS) existing  math error authority (MEA) as well as authorities we recently suggested  that Congress provide to enhance compliance, including for certain tax  credits. In addition, last year we recommended that the IRS Commissioner  use existing MEA to identify and correct child and dependent care credit  claims on “Married Filing Separately” returns and assess the effectiveness  of combining the Federal Case Registry and other data on taxpayer  characteristics to verify the eligibility of Earned Income Tax Credit claims  from noncustodial parents.
section_title: Appendix III: IRS’s Processing Performance Relative to 2004 Through 2008 and 2009 Goals
paragraphs: As shown in table 9, the Internal Revenue Service (IRS) met or exceeded  goals for six out of eight of its goals for the percentage of errors included  in deposits and correspondence (which was separated into letter and  notice errors in previous years); deposit and refund timeliness (i.e.,  interest foregone by previous years); productivity; and individual master  file (IMF) efficiency.
One measure where performance was significantly below IRS’s goal and  below last year’s level was the correspondence error rate, the percentage  of incorrect notices and letters issued to taxpayers. According to IRS  officials, this resulted from a high number of erroneous notices sent to  taxpayers claiming the recovery rebate credit early in the filing season.
section_title: Appendix IV: IRS Toll-Free Calls and Percentage of Callers Seeking and Receiving Live Assistance for 2009 and 2008
paragraphs: During the 2009 filing season, the Internal Revenue Service (IRS) received  most of the calls early on, with the heaviest call volume during February  (see fig. 2 below). Most of the calls were related to taxpayers’ need for  authentication information and tax law changes. In contrast, during the  2008 filing season IRS received most of the calls after the filing season,  between April and June and were primarily stimulus-related questions.
section_title: Appendix V: Key Facts on Selected Tax Benefits for Higher Education
paragraphs: Taxpayers can generally claim tax benefits to help offset qualified higher  education expenses for an eligible student if the eligible student is the  filing taxpayer, their spouse, or a dependent for whom they claim an  exemption on a tax return. Tax benefits include credits, deductions, as  well as a number of other programs to help taxpayers offset qualified  education expenses. Unlike other student aid programs such as federal  grants that offer assistance to the taxpayer in determining their  entitlements, tax benefits require the taxpayer to understand the pertinent  rules and, ultimately, choose the option that provides the most benefit.
Information reported by educational institutions on the tuition statement  (Form 1098-T) assists taxpayers in determining the amount of benefits to  which they are entitled. Consequently, inaccurate information on the  tuition statement may contribute to taxpayer confusion and result in  taxpayers making less-than-optimal claims or being unintentionally  noncompliant.
Table 10 below provides information on tax benefits for education that are  available to qualifying taxpayers for the 2008 and 2009 tax years.
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
paragraphs: James R. White, (202) 512-9110 or whitej@gao.gov.
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Joanna M. Stamatiades, Assistant  Director; Vida Awumey; John P. Dell’Osso; Kara Eusebio; Melanie D.  Helser; Lina Khan; Kirsten B. Lauber; Angela Leventis; Natalie Maddox;  Paul B. Middleton; Karen V. O’Conor; Sabine R. Paul; Neil Pinney; Sabrina  C. Streagle; and Jessica Thomsen made key contributions to this report.