2013 Tax Filing Season: IRS Needs to Do More to Address the Growing Imbalance between the Demand for Services and Resources
Released: 2013-12-18T00:00:00

Letter

Background

IRS Processing and Taxpayer Services

Processing: IRS processes millions of paper and electronically-filed (e-filed) tax returns and validates key pieces of information during the tax filing season. The overwhelming majority of returns are e-filed through IRS’s Modernized e-File (MeF) system. Beginning last filing season, IRS and taxpayers benefitted from IRS’s switch from weekly to daily tax return processing on its Individual Master File (IMF) legacy system which allowed for faster refund processing for more taxpayers. IRS is continuing to transition from its antiquated IMF legacy system to a more modern return processing system known as the Customer Account Data Engine 2 (CADE 2).

Telephone: Taxpayers can call to speak directly with an IRS customer service representative (CSR) to obtain information about their accounts or ask tax law questions. Taxpayers can also listen to recorded tax information using automated telephone menus. Automated services are provided on IRS’s 149 Tele-tax lines for tax law topics and 71 phone lines for account information.

CSRs are also responsible for responding to paper correspondence from taxpayers. IRS tries to respond to paper correspondence within 45 days of receipt, and considers correspondence that is not addressed within that time to be overage. Minimizing the amount of overage correspondence is important because delayed responses may prompt taxpayers to write again or call IRS.

Website: On IRS.gov, taxpayers can download forms, instructions, and publications and research tax law issues using interactive tools. Taxpayers can use interactive tools to check the status of their refunds, request transcripts (which are copies of a taxpayer’s account information), and apply for IAs.

Face-to-Face Assistance: Taxpayers can obtain face-to-face assistance at IRS’s 390 Taxpayer Assistance Centers (TAC) or at more than 13,000 sites staffed by volunteer partners. At TACs, IRS staff provide answers to basic tax law questions, review and adjust taxpayer accounts, take payments, authenticate Individual Taxpayer Identification Number applicants and identity theft victims, and prepare returns for qualified taxpayers. At the sites staffed by volunteers, taxpayers can receive return preparation assistance as well as financial literacy information.

Installment Agreements

Taxpayers can enter into IAs to pay their tax debts after filing their return with a balance due. IAs are an important tool for IRS to collect revenue. IRS assesses and collects billions of dollars each year through IAs. IAs can be established, paid off, defaulted on, reinstated, or terminated at any time during the year. IRS provides four types of IAs—Guaranteed, Streamlined, Regular/Routine, and Partial Payment—with different eligibility and payment requirements. IAs allow taxpayers to pay off their tax liabilities gradually over time and can encompass multiple years. Failure to adhere to the terms of the IA can cause default, termination, The most common type of IA by and more expensive collection actions.far is the streamlined agreement, which provides taxpayers with flexibility in paying off liabilities. Appendix I provides additional information on the types and characteristics of IAs.

Individual Non-filers

IRS defines a non-filer as a taxpayer who has a legal obligation to file a return, but fails to file a return by the filing deadline (either April or October depending on whether the taxpayer filed for an extension). IRS is authorized to issue a notice requesting a delinquent return and it can send up to four notices to taxpayers.

IRS Achieved Processing Efficiency Gains, but Continues to Face Challenges in Providing Service to Taxpayers

Electronic Filing Continued to Grow

Despite late tax law changes which delayed the start of filing season and compressed the time that IRS had available to process tax returns, IRS officials and external stakeholders such as large tax preparation firms reported relatively smooth processing, with a few exceptions. IRS usually begins processing tax returns in early to mid-January; this year, it started processing most returns January 30, 2013.

Table 1 shows that IRS achieved an 84 percent e-file rate for individual returns, and processed 11 percent fewer paper returns compared to last year. Continued increases in e-filing are important because processing costs are lower for e-filed returns. According to IRS, in fiscal year 2012, it cost 23 cents to process an e-filed return, as opposed $3.36 for returns filed on paper. IRS relied solely on MeF this filing season, and attributed this success to expanded testing of the system which improved the MeF’s stability and facilitated return processing. External stakeholders confirmed IRS’s assertion about the reason for MeF’s success.

Although operations were relatively smooth, IRS and others reported issues that delayed processing for tax returns filed with Form 8863 (Education Credits), and with Form 5405 (First-time Homebuyer Credit). While IRS was able to resolve processing delays for about 700,000 tax returns filed with the Form 8863, multiple class action suits have been filed against a large tax preparation firm regarding the issues involved in the processing delays.about 88,000 returns filed with Form 5405 that were caused by a compliance filter that resulted in additional scrutiny.

Access to Telephone Service Remained the Same as Last Year, and Correspondence Service Continues to Deteriorate Due to the Imbalance between Demand and Resources

Table 2 shows that, in 2013, IRS received 93.5 million calls— a 5 percent decrease from 2012 but higher than 2009 through 2011. Compared to 2012, IRS answered almost 9 percent fewer calls using automated services. Officials attributed some of the reduction in automated calls answered to fewer e-file personal identification number requests. Answering as many calls as possible through automation is important because IRS estimates that it costs 38 cents per call to provide an automated answer, but about $33 per call to use a live assistor.

Table 2 also shows that callers experienced a shorter average wait time to speak to an IRS assistor this year compared to the same period last year, but the time was still much longer than 2008 through 2011. The percentage of callers seeking live help who received it stayed the same as 2012 at 68 percent.

In 2010, we found that that IRS sets its annual goal based on factors such as resource availability, the expected number and complexity of calls, and anticipated volume of taxpayer correspondence, but not on an analysis of what taxpayers would consider to be good service. At that time, we recommended that IRS determine a telephone standard based on the quality of service provided by comparable organizations, what matters most to the customer, and resources required to achieve this standard based on input from Congress and other stakeholders. IRS disagreed saying its current process of developing a planned level of telephone service takes into consideration many factors, including its budget and assumptions about call demand. We noted, however, that such a standard would allow IRS to communicate to Congress what it believes constitutes good service. Further, since 2010, the IRS Oversight Board has said than an acceptable level of service (LOS) should be about 80 percent.

However, IRS has yet to set such a standard.

Almost Half of All Taxpayer Correspondence is Overage, and IRS Has Plans to Conduct More Evaluations of Taxpayer Correspondence

As shown in Table 3, the amount of correspondence received between 2009 and 2013 increased from 19 to 21 million (a 10.5 percent increase) and the percentage of overage correspondence nearly doubled to 47 percent in 2013 from 25 percent in 2009. As noted earlier, IRS generally considers paper correspondence that is not resolved within 45 days to be overage.

In December 2010, we concluded that providing timely responses to paper correspondence remains critical to taxpayer service because if IRS’s responses take too long taxpayers may write again or call IRS for additional assistance. We recommended that IRS establish a performance measure that includes providing timely correspondence service to taxpayers. IRS agreed to this recommendation, and is beginning to take steps to implement it. Since we made that recommendation, the percentage of overage correspondence has continued to increase. IRS officials attribute the increase in the percentage of overage correspondence to budget constraints (less overtime for CSRs who provide both telephone assistance and work paper correspondence), and more complex taxpayer inquiries such as correspondence related to identity theft cases which can be more time consuming to address.

IRS has taken some steps to identify why taxpayers write in. Based on a recent small, judgmental sample of correspondence cases, IRS found that the top three most common reasons taxpayers write in are: balance due payoffs, penalty abatements, and miscellaneous account inquiries. In that same sample, IRS found that its own processes, such as the wording of notices or requirements for a paper signature, influenced taxpayers to write in. IRS officials told us they are currently analyzing a statistically valid sample of correspondence to identify additional factors that influence the level of correspondence.

Website Use Has Increased, While Some Face-to-Face Services Continue to Decline

Use of IRS.gov continues to increase, with IRS receiving approximately 374 million visits to its website through July 2013, an increase of nearly 26 percent over the same period in 2012. IRS officials attribute this increase to the launch of the redesigned website, introduction of new online tools such as Where’s My Amended Return, and implementation of the Patient Protection and Affordable Care Act.recommended that IRS develop a long-term strategy to improve web We previously services provided to taxpayers that includes studies of leading practices at a strategic level, measurable goals for taxpayer satisfaction, business cases for new online services that describe potential benefits and costs and prioritized projects, and links to investments in security. IRS reported that it is planning to update its long-term web services strategy to include our recommended changes in early 2014. See Appendix III for additional information on website use from 2008 through 2013.

IRS received about 2.6 million visits to its TACs, a decline of approximately 5 percent from 2012. Additionally, the number of returns prepared continues to decline—in 2013, IRS prepared nearly 125,000 returns at TACs, about a 16 percent decline from 2012. IRS attributes the decline to its efforts to manage demand, and increased taxpayer awareness of online tools and services. In contrast, the number of returns prepared at the roughly 13,000 volunteer sites increased 5 percent between 2012 and 2013, to nearly 3.3 million in 2013. See Appendix IV for additional information on services and taxpayer use of TACs and volunteer sites since 2010.

IRS Has Proposed Eliminating Some Services in 2014, but the Cuts May Not Stop the Deterioration in Performance or Address GAO’s Recommendation from Last Year

In 2012, we noted that IRS needs to dramatically revise its strategy for providing telephone and correspondence services and recommended that it define appropriate levels of telephone and correspondence services based on an assessment of demand and resources among other things.IRS neither agreed nor disagreed with our recommendation, saying it already has an objective of providing taxpayers with access to accurate services while managing demand. However, IRS’s efforts to date have not reversed the declines in taxpayer service. We noted, and IRS officials acknowledged, that incremental efficiency gains of the type IRS has realized in recent years would not be enough to combat the imbalance between taxpayer demand for services and available resources. We concluded that, with expected levels of resources, reversing the declines in telephone and correspondence services may require IRS to consider difficult tradeoffs such as limiting the types of phone calls that would be answered.

Given expected budget levels for the 2014 filing season, IRS has identified six services for elimination or reduction, which officials told us were chosen because taxpayers had other options. IRS officials reported that they have discussed these options within IRS, with external stakeholders, and with Congressional committees that oversee IRS operations.

IRS’s proposed service eliminations or reductions are: 1. Limiting tax law inquiries to answer only basic tax law questions during the filing season, and reassigning CSRs to work account- related inquiries; 2. Launching the “Get Transcript” tool, which will allow taxpayers to obtain a viewable and printable transcript online on www.irs.gov, and redirecting taxpayers to this and other automated tools for getting a transcript; 3. Redirecting refund-related inquiries to automated services and not answering refund inquiries until 21 days after the tax return has been filed, except for refunds held for potential fraud; 4. Limiting access to the Practitioner Priority Services line to only those practitioners working tax account issues; 5. Limiting live assistance and redirecting requests for domestic Employer Identification Numbers to IRS’s online tool; and 6. Eliminating free return preparation at IRS’s TAC sites and directing taxpayers to free alternatives including at IRS partner sites staffed by volunteers.

The proposed elimination or reductions in services are examples of the difficult choices that we recommended need to be made if more timely access to telephone service and handling of correspondence is going to be achieved from the available IRS resources. While these cuts represent initial steps consistent with our recommendation from last year, they do not fully address it. Furthermore, even with these reductions, officials in IRS’s Wage and Investment Division responsible for the filing season told us they are anticipating that the level of telephone service could be 61 percent in 2014. IRS reported that it is working on final approval to implement the service options and bring about a better balance between demand for service and resources. However, the continued deterioration in taxpayer service in 2013, high cost of shifting staff from collections work to the telephones and correspondence, and anticipated level of telephone service for 2014 all highlight the importance of continuing to address the recommendation we made last year based on the need for a dramatic revision in IRS’s strategy. The choice may be between providing a broader range of services at a low level of performance or a narrower range of services at a higher level of performance. Until IRS develops a strategy, it risks not communicating expectations about the level of services it can provide based on the resources available. IRS could then use the strategy to facilitate a discussion with Congress and other stakeholders about the appropriate mix of service, level of performance, and resources.

IRS Recently Expanded the Installment Agreement Program, but Some Case Handling Practices Lack Standardization and are Unnecessarily Redundant

Taxpayers can apply for IAs online, by phone, in person, or by completing Depending on and mailing Form 9465, Installment Agreement Request.the type of IA, taxpayers can make their monthly payments via check or money order, direct debit, payroll deduction, online, or credit card. If a taxpayer fails to make monthly payments on time or incurs a new tax liability, the taxpayer is considered to be in default on the IA with a few exceptions. Appendix V shows the process for taxpayers entering into and making payments on IAs.

Table 4 shows that, in fiscal year 2012, IRS approved more than 3 million new IAs and collected $9.8 billion. At the end of fiscal year 2012, IAs represented nearly $28 billion in unpaid balances. The difference between the amount of unpaid balance of assessment and amount collected is due to the fact that IAs can be paid off over multiple years. According to IRS officials, the increases in IA inventory since 2009 are due to a variety of factors, such as more taxpayers entering into IAs because of expanded eligibility and payment terms discussed below, and changes in the economy.

Table 4 also shows, in fiscal year 2012, taxpayers defaulted on approximately 1.2 million IAs. In 2012, we found that, of those taxpayers that had a balance due at the filing deadline, almost two-thirds eventually paid in full or entered into IAs, and about 18 percent of taxpayers defaulted on IAs in fiscal year 2012. Therefore, we recommended that IRS pilot risk-based approaches for contacting taxpayers who have a balance with the goal of reducing the default rate. IRS agreed with the recommendation, but has not funded the related research project. Until IRS tests and implements more advanced risk-based approaches, it may be challenged to deal with the default problem.

In 2012, IRS expanded its Fresh Start Initiative to assist struggling taxpayers in meeting their tax obligations.

Specifically, the threshold for requesting a streamlined IA was raised from $25,000 to $50,000 and the maximum term for streamlined IAs was increased from 60 to 72 months for repayment. The expanded eligibility for streamlined IAs in particular allowed more people to qualify for the program and potentially pay taxes owed. Also under Fresh Start, IRS is encouraging taxpayers with IAs to sign up for direct debit agreements which generally have lower default rates. IRS said it is difficult to pinpoint which specific aspects of the Fresh Start initiative are effective. IRS is currently conducting an analysis of the initiative’s benefits in terms of collection and default prevention. As of November 2013, that analysis has not been completed.

IRS allocated about 1,800 FTEs to the IA program in fiscal year 2012, which is over a 10 percent increase since fiscal year 2009. The level of and growth in this area highlights the importance of testing and implementing risk-based approaches for collecting balances due including through IAs.

Some IA Case Handling Practices Lack Standardization and Include Unnecessary Redundancy

IRS recently made process improvements to help streamline and standardize its IA program operations. For example, IRS introduced automated tools, known as the Compliance Suite, which provides tax examiners (TEs) with online tools such as helping the TE determine which letter to send to the taxpayer. However, despite these process improvements, we observed some inefficiency. For example, we observed that some TEs had developed their own extensive sets of prewritten, standardized case notes that allowed them to quickly update a taxpayer’s account because the Compliance Suite lacked that capability.

IA program managers were aware of this practice, said it gives TEs flexibility in writing case notes, but agreed that automated case notes may yield efficiencies. They also noted that the Compliance Suite was only introduced a few months ago, and its full capabilities were being explored. We agree that flexibility is desirable but providing an extensive set of standardized notes in the Compliance Suite would give all TEs the option of using them. This could lower the cost of making account entries.

In addition, we found unnecessary redundancy. We observed TEs handwriting case notes on paper copies of IAs and then typing those same notes into IRS’s computer systems. IRS managers agreed this practice is redundant, and TEs noted this is the way it has always been done. Such redundant data entry increases the time it takes TEs to handle each IA case. Furthermore, GAO’s internal control guidance states that control activities should be regularly evaluated to ensure their appropriateness in intended function.

By not developing a more standardized comprehensive set of case notes and not reducing redundant data entry, IRS is missing opportunities to reduce resources devoted to handling IA case files. With 1,800 FTEs devoted to the program, small gains in the efficiency of each TE could add up to substantial savings.

IRS’s Identification of and Notification to Potential Non-Filers Takes Months after Filing Deadlines

Beginning in October, IRS uses prior year tax returns, third-party reports, such as W-2s and Forms 1099, and applications for automatic extensions of time to file to identify taxpayers who appear to have missed the mid- April tax return filing deadline. In June 2013, we found that most information reports are not received by IRS until well after the April tax return filing deadline.

IRS does a second match in March of the following year for taxpayers who filed an extension. According to IRS officials, not all potential non- filer cases identified are selected for notification and review; IRS prioritizes cases based on factors such as income, the potential to collect taxes due, and whether the taxpayer is an IRS or other federal employee.

After the first match in October, IRS sends notices to non-filers in November and December requesting the return or a justification for not filing. IRS begins to send notices to cases from the second match between March and July.

Table 5 shows that, in tax year 2010 (the year for which the most current data are available), IRS identified over 7.4 million potential non-filer cases. Of these, IRS selected more than 3.2 million cases for review and sent notices to those non-filers requesting the return. IRS officials said the percentage of cases selected for review fluctuates based on resources and selection criteria, such as income and potential balance due amounts, which vary from year-to-year.

Table 5 also shows in tax year 2008 (the year for which the most complete data are available), IRS received approximately 1.4 million delinquent returns, which is about 39 percent of the non-filers selected for review and notification. IRS officials attribute the relatively low number of returns filed in response to notices to taxpayers that have stopped filing for unknown reasons, those that do not have the resources to pay the potential balance due, and taxpayers who do not file until more extensive collection actions are taken. Securing the delinquent return as soon as possible as part of IRS’s notification process is important because taxpayers continue to incur penalties and interest until they file a return and IRS undertakes increasingly expensive enforcement actions against the taxpayer.

In addition to taxpayers who do not respond to notices, IRS’s existing non-filer strategy notes that IRS also has a significant problem with repeat non-filers. For fiscal year 2012, IRS data shows that 43 percent of closed cases were repeat non-filers that did not file for more than 1 tax year.

As of November 2013, IRS is waiting on executive approval for its updated non-filer strategy which it expects to receive by the end of the year and should address how IRS plans to improve non-filer compliance including notice response and repeater rates. IRS is currently analyzing data on the characteristics of non-filers, such as filing status, income, and other key characteristics, and their response rates to the notifications to determine the best approach, and expect this effort to be completed in January 2014. IRS officials also are considering several initiatives for improving the notification process once its updated non-filer strategy is approved.

Conclusions

Despite efficiency gains in processing returns, additional website services, and shifting employees from working collections cases to handling telephone calls and correspondence, the gap between taxpayers’ demand for service and IRS resources widened. As a result, taxpayer access to IRS’s telephone assistors remained at a low level and the percentage of overage correspondence grew. The widening gap highlights the importance of fully implementing our recommendation made last year for a dramatic revision in managing taxpayer service that defines an appropriate level of service and recognizes both the demand for services and resources available. We stressed that this would mean making difficult tradeoffs. Consistent with our recommendation, IRS has proposed eliminating or reducing some services. By eliminating or reducing some services IRS should be able to devote more resources to its continuing services. However, IRS officials told us that the cuts proposed so far may not reverse the decline in telephone and correspondence performance. As a consequence, the cuts may only be a down payment on the difficult choices needed and our recommendation needs to be fully addressed. Fully addressing our recommendation would result in a strategy that could be used to facilitate a discussion with Congress and other stakeholders about the appropriate mix of service, level of performance, and resources.

The imbalance between the demand for services and resources also puts a higher priority on scrutinizing existing processes for possible further efficiency gains. We identified opportunities in the processing of installment agreements where the existing process could be further streamlined to reduce resources by standardizing case notes and reducing unnecessarily redundant data entry.

Recommendation for Executive Action

We recommend that the Commissioner of Internal Revenue develop a set of standardized account entries and eliminate unnecessary redundancy when entering installment agreement data into accounts.

Agency Comments and Our Evaluation

We provided a draft of this report to the Acting Commissioner of Internal Revenue. IRS provided written comments on a draft of the report, which are reprinted in Appendix VI. IRS also suggested technical changes to the report, which we incorporated where appropriate.

IRS did not state whether it concurred with the recommendation. However, IRS acknowledged that standardized account entries can sometimes lead to increased efficiencies and lower costs, and taxpayers and IRS can benefit by the elimination of redundancy in its processes. IRS stated that as it continues to evaluate the Compliance Suite to determine its full capabilities, it will (1) explore whether the introduction of standardized account entries into the IA process will yield increased efficiencies and lower costs; and (2) evaluate whether there are unnecessary redundancies in its current processes that can be eliminated without adversely affecting tax administration. GAO believes the recommendation remains valid as discussed in the report.

We plan to send copies of this report 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 Acting Commissioner of Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS Oversight Board, and the Deputy Director for Management of the Office of Management and Budget. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in Appendix VII.

Appendix I: Installment Agreement Types and Characteristics

Of the four types of IAs available to individual taxpayers, the most common type of IA by far is the streamlined.

Appendix II: Weekly Toll-Free Calls and Percentage of Callers Seeking and Receiving Live Assistance

Figure 1 shows that during the 2013 filing season, the Internal Revenue Service (IRS) received most of its calls in the period leading up to and including the April 15th filing deadline, with the heaviest volume of calls in the early to mid-February timeframe. Importantly, the figure below shows that access to live assistance begins to decline sharply in the weeks following the filing deadline.

Appendix III: Use of IRS Website and Online Services

Table 7 shows that in 2013 use of IRS.gov increased by 26 percent compared to 2012. Use of the online tools such as the volunteer site locator, Where’s My Refund, electronic personal identification number requests, and interactive tax assistance tools continued to increase in 2013. IRS attributes declines in downloading forms and publications, and generally searching the website, to changes in how IRS tracks website use in these areas.

Appendix IV: Services Offered at Walk-In and Volunteer Sites

Face-to-face service remains an important component of IRS’s efforts to serve taxpayers, particularly those with low incomes or limited proficiency in English. Table 8 shows that, for 2013, the total number of contacts at walk-in sites, Taxpayer Assistance Centers (TAC) staffed by IRS employees, is the lowest level for the 4 year period shown. Further, return preparation has steadily declined since 2010 due to IRS’s continuing efforts to reduce expensive return preparation services. Conversely, the total number of returns prepared at sites staffed by volunteers has increased since 2010.

Appendix V: Installment Agreement Process

Appendix VI: Comments from the Department of the Treasury

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Joanna Stamatiades, Assistant Director; Shilpa Grover; Emily Gruenwald; Lois Hanshaw; LaKeshia Allen Horner; Kirsten Lauber; Natalie Maddox; Karen O’Conor; Anna Maria Ortiz; Kelly Rubin; and John Zombro made key contributions to this report.