Tax Administration: IRS Improved Performance in the 2004 Filing Season, But Better Data on the Quality of Some Services Are Needed
Released: 2004-11-15T00:00:00

Letter

Scope and Methodology

Our assessment of IRS’s 2004 filing season performance was based on analyses of IRS data and information obtained from sources outside IRS, interviews with IRS officials and private sector tax practitioners, observations of IRS operations, and, for the comparison to previous years, on our past filing season reports. reviewed and analyzed IRS reports, testimonies, budget submissions, other documents and data, including workload data and data from IRS’s current suite of balanced performance measures, which we used to assess performance this year; interviewed IRS officials about current operations, performance relative to 2004 goals and prior filing seasons, and significant factors and initiatives that affected performance; interviewed representatives of large private and non-profit organizations that prepare tax returns and trade organizations that represent both individual practitioners and tax preparation companies; reviewed related TIGTA reports and interviewed TIGTA officials; followed up on GAO recommendations made in prior filing season and tested for statistical differences between yearly changes for various IRS analyzed information posted to IRS’s Internet Web site based on GAO’s knowledge of the type of information taxpayers look for, and assessed the ease of finding information, as well as the accuracy and currency of data on the site; reviewed information from companies that evaluated Internet performance and assessed various aspects of IRS's Web site; and reviewed staffing data for paper and electronic processing, telephone assistance, and walk-in assistance.

This report discusses filing season performance measures and data covering the quality, accessibility, and timeliness of IRS’s services. We have previously reported that some of the performance measures IRS uses to assess aspects of its filing season performance had attributes of successful measures, including objectivity and reliability, although in some cases, the measures could be further refined. Since that report, IRS has made refinements in some measures. We also reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to GAO standards of data reliability. As a result, we determined that the IRS data we are reporting are sufficiently reliable for assessing IRS’s filing season performance. Data limitations are discussed where appropriate.

We conducted our work at IRS headquarters in Washington, D.C.; the Small Business/Self-Employed Division headquarters in New Carrollton, Maryland; the Wage and Investment Division headquarters, the Joint Operations Center (which manages telephone service), and a telephone call site in Atlanta, Georgia; and walk-in and volunteer locations in Georgia, Maryland, and Virginia. We selected these offices for a variety of reasons, including the location of key IRS managers, such as those responsible for telephone and walk-in and volunteer services. We performed our work from January through October 2004 in accordance with generally accepted government auditing standards.

Background

IRS’s filing season is an enormous and critical undertaking that includes two key activities—returns processing and taxpayer assistance—and which consumes thousands of staff years annually. Processing of paper returns is labor intensive and error-prone. IRS employees manually transcribe paper tax return information into IRS’s computer systems, which can introduce errors. Electronic filing allows taxpayers to receive refunds faster, and processing is less labor-intensive and error prone than for paper returns. IRS does not have to transcribe electronic tax return information and built-in checks eliminate many errors that IRS has to deal with when processing paper tax returns, such as computational mistakes and incorrect social security numbers. The rate for this type of error on electronic tax returns was almost 4 percent compared to almost 25 percent on paper tax returns, as of July 9, 2004.

To help taxpayers comply with their tax obligations, IRS provides various services at its call sites, walk-in sites, and on its Web site. Figure 1 shows how toll-free telephone calls from taxpayers typically are routed through IRS’s telephone system and answered by customer service representatives (CSRs) or by automated services.

At IRS’s approximately 400 walk-in sites taxpayers ask tax law questions, get account information, receive assistance with their accounts, and have returns prepared (if annual gross income is $35,000 or less). In addition, low-income and elderly taxpayers get tax returns prepared at over 13,500 volunteer sites run by community-based coalitions that partner with IRS. IRS awards grants, trains and certifies volunteers, and provides reference materials, computer software and, in some cases, computers to these volunteer organizations.

IRS’s Web site is important because it allows taxpayers to instantly download hundreds of tax forms and publications, access current information on tax issues and electronic filing, and ask IRS tax law and procedural questions.

Since passage of the IRS Restructuring and Reform Act of 1998 (RRA 98), IRS has been focused on improving filing season services. In 2001, IRS established a suite of balanced performance measures. The system emphasizes accountability for achieving specific results and reflects IRS’s priorities, including providing quality service to each taxpayer in every interaction. As part of its strategic planning and budgetary processes, IRS establishes performance goals each fiscal year and uses them to hold managers and frontline staff more accountable for improving filing season performance.

IRS Has Generally Improved Its Performance Processing Tax Returns but Does Not Expect to Meet Its Long-Term Electronic Filing Goal

IRS processed individual income tax returns and issued refunds smoothly in 2004. IRS nearly met or exceeded many of its 2004 performance goals, with performance generally improving since 2001. However, despite continued growth this year and despite various initiatives to encourage electronic filing, IRS is not on track to achieve its long-term goal of having 80 percent of all individual tax returns filed electronically by 2007.

As of September 17, 2004, IRS had processed about 128 million individual tax returns, including for 67 million returns filed on paper, with no significant disruptions and issued nearly 100 million refunds within specified tolerances. According to IRS data, IRS nearly met or exceeded seven out of its eight processing performance goals in 2004. Similarly, 2004 performance nearly met or exceeded 2003 performance for six of the seven comparable measures. Appendix 1 provides details. Furthermore, as Appendix 1 and the following examples show, IRS has generally improved its processing operations over a longer period.

The percent of notices with errors has declined since 2002 (for notices sent to taxpayers about possible simple mistakes on their returns). In 2002, 18.7 percent of the notices were issued with errors compared to 9.4 percent as of July 31, 2004 (the most current data available).

The refund error rate, the percentage of refunds with IRS-caused errors (e.g., incorrect name or Social Security number), has decreased from 9.8 percent in 2001 to 5.3 percent in 2003, to 4.9 percent as of July 31, 2004 (the most current data available).

Tax practitioners, who last year prepared approximately 62 percent of all individual income tax returns, agreed that the processing of returns in the 2004 filing season has gone smoothly. Representatives from the National Association of Enrolled Agents, American Institute of Certified Public Accountants, and other tax related organizations had positive comments on IRS’s 2004 filing season and processing. Similarly, TIGTA officials told us that IRS generally processed returns smoothly in 2004.

IRS officials attributed this year’s performance in part to their planning for tax law changes, such as the advance child tax credit and the increase in electronic filing.

Electronic Filing Grew but Is Not on Track to Achieve Long-Term Goal

The number of individual income tax returns that IRS received electronically continued to grow, and IRS exceeded its 2004 goals for the number and percentage of tax returns to be filed electronically. From January 16 through September 17, 2004, it had received an estimated 61.1 million individual tax returns electronically or 47 percent of all returns filed to date. Also, the growth rate of 15.8 percent is greater than IRS’s projected growth rate of 13 percent for this year. Figure 2 shows that growth since 1996.

According to IRS officials, the primary reason for the greater than expected growth rate is that five states mandated electronic filing of state tax returns prepared by qualified tax practitioners for 2004. According to these same officials, these mandates led to significantly more electronic filing of federal tax returns in these states because tax practitioners converted their entire practices to electronic filing. For example, for California and Michigan, the largest of the five states, the number of tax returns filed electronically increased from 4.7 million and 1.9 million in 2003 to 7.1 million and 2.6 million respectively as of May 2004.

The current rate of growth of electronic filing, however, will not allow IRS to achieve its long-term electronic filing goal of 80 percent of all returns by 2007, provided by RRA 98. Assuming a continuation of the current growth rates of 15.8 percent for individual returns filed electronically and .23 percent for the total number of individual tax returns filed, IRS would receive 73 percent of individual tax returns electronically by 2007.

However, neither IRS nor the Electronic Tax Administration Advisory Committee (ETAAC) expects IRS to maintain this year’s growth rate. In fact, IRS is predicting declining growth rates of about 11.5 percent, 9.9 percent, and 8.1 percent in 2005, 2006 and 2007, respectively. In its June 30, 2003, report to Congress, ETAAC concurred with IRS’s prediction of lower annual growth rates.

IRS officials stated that achieving the 80 percent goal would require taxpayers and tax practitioners who prepared 39 million individual income tax returns on a computer but filed them on paper would instead have to file them electronically, or legislation would have to be proposed and passed that mandates electronic filing by tax practitioners.

Electronic filing is important because, according to IRS, it costs less to process electronic tax returns than paper tax returns. IRS estimates it saves $2.15 on every individual tax return that is processed electronically. However, we cannot independently verify this estimate and its basis is unclear, because as we have reported, IRS does not have a cost accounting system to support preparation of such cost estimates. Electronic filing has allowed IRS to close paper processing centers, devote less staff to the processing of tax returns, and control processing costs by shifting resources from labor-intensive paper return processing to other areas, such as compliance. For example, with the elimination of paper tax return processing at the Brookhaven Submission Processing Center, IRS used about 1,000 fewer staff years to process paper returns in 2003 than in 2002, and plans additional staff-year savings when paper tax returns processing at the Memphis Submission Processing Center is eliminated in 2005. (See app. 2 for more information on staff years).

Because increasing electronic filing is so important, IRS officials do not want to reduce the 2007 goal, even though IRS projects that it is not achievable. Retaining this goal serves as a symbol of their determination to take actions to convert taxpayers to file electronically.

IRS Has Taken Numerous Actions to Encourage More Electronic Filing

Over the years, IRS has taken numerous actions to encourage electronic filing, including making electronic filing free to most taxpayers via the Free File Alliance Program, a program that began last year; surveying taxpayers and tax practitioners in response to a recommendation in our 2001 filing season report to determine why 40 million tax returns were prepared on a computer but filed on paper; making over 99 percent of all individual tax forms suitable for electronic making the process totally paperless if a person uses a personal identification number to sign the tax return.

For the 2004 filing season, IRS took the following actions to encourage taxpayers and practitioners—primarily those who prepared returns on a computer, but filed them on paper—to file electronically IRS. IRS improved the Free File Alliance Program (as of September 17, 2004, about 3.5 million individual tax returns have been filed electronically via the Free File Alliance, compared to 2.8 million for all of last year, a 26 percent increase); contacted about 12,200 tax practitioners who prepared business returns on computers, but filed electronically to advise them about the benefits of electronic filing; targeted the approximately 8 million individual taxpayers who filed their own paper returns prepared on a computer by mailing them a modified version of Publication 8160E that cites the advantages of electronic filing; spent $11.2 million marketing electronic filing; and made six more forms available for electronic filing.

Other major electronic filing initiatives could lead to more individual electronically filed tax returns starting in 2005. However, IRS did not expect the following initiatives to dramatically increase electronic filing in 2004 because taxpayers and practitioners will need time to adjust their behavior.

The modernized E-file program, which for the first time, allows electronic filing of corporate tax returns, could lead to more individual tax returns being filed electronically. According to IRS officials, some tax practitioners reported they would not file electronically until they could do so for both individual and corporate tax returns, saying it did not make business sense to file tax returns two different ways.

The E-services program, offered to tax practitioners who have filed at least 100 electronic tax returns, gives them the ability to conduct business, such as electronic account resolution and transcript delivery with IRS electronically 24 hours a day 7 days a week for services.

Despite these initiatives, IRS does not expect to reach its 2007 goals for electronic filing. However, because of the potential for cost savings, we continue to see value in such initiatives.

Access to IRS’s Telephone Assistors Improved but Tax Law Accuracy Declined

IRS exceeded its 2004 telephone service goal for access to customer service representatives (CSRs) and has improved in this area since 2001. However, the accuracy of CSR answers to tax law questions declined. IRS initiated two pilots in 2004 to help assess options for improving its telephone service.

Access to Customer Service Representatives Continued to Improve; the Accuracy of Account Inquiries Was Stable; but the Accuracy of Tax Law Questions Declined

IRS received 84 million calls on its toll-free telephone lines in 2004 through mid-July. Figure 3 shows that almost half of those calls were from callers trying to obtain information on the status of their tax refunds; the rest were primarily account or tax law questions.

Figure 4 shows how the calls were handled. IRS’s automated service handled 30 million calls and CSRs handled 24 million. The rest of the calls came in after business hours, were transferred, were disconnected, or the caller hung up before receiving service.

As table 1 shows, compared to last year, access to CSRs continued to improve, the average time taxpayers waited for CSRs remained stable, and the accuracy of CSR responses to account questions remained stable, while the accuracy of CSR responses to tax law questions declined.

Unlike calls to CSRs, IRS does not have a quality measure for its automated telephone services. In our report on IRS’s performance measures, we recommended that IRS develop a customer satisfaction survey to measure approval of the automated service. At the time, the IRS Commissioner responded that he agreed that measuring customer satisfaction for automated service was important. According to IRS officials, the needed computer programming changes were not done for the 2004 filing season, but are in the queue to be done when programming resources permit.

IRS officials continue to attribute the decline in tax law accuracy rate primarily to changes made to the CSR’s Probe and Response (P&R) Guide, a publication that CSRs use to help them answer taxpayers’ tax law questions. Last year, we reported that IRS attributed the decline in the tax law accuracy rate on a new format for the P&R guide, among other factors. At that time, an IRS official believed that after CSRs became familiar with the guide, the problem would be resolved and IRS continued using the new format. IRS began to address the problems with the P&R guide during the 2004 filing season. For example, CSRs told us that they attended a meeting of managers and CSRs in March 2004 to identify the problems with the guide and develop an action plan to correct the problems. According to IRS officials, IRS tested changes to the guide at the St. Louis, Missouri and Cleveland, Ohio call sites in June 2004. In addition, IRS has a written plan with deadlines for testing the guide for the 2005 tax filing season. The new guide was to be made available in hard-copy by October 1, 2004 and was to be used for purposes of training employees before the start of the 2005 filing season.

IRS Initiated Two Pilot Programs For Telephone Service

IRS initiated two pilot programs in 2004 to assess options for improvements on its toll-free telephone services. IRS piloted having a contractor answer tax law questions instead of IRS employees to determine (1) if a contractor could deliver an equal or superior level of service and (2) the public’s perception regarding being assisted by someone other than IRS employees. IRS routed 10 percent of the tax law calls received on its toll-free lines to a contractor for 60 days (February through April 2004). With respect to the accuracy of tax law responses provided to taxpayers, the contractor’s performance was about half that of IRS’s—44.6 versus 82.46 percent, respectively. IRS attributed the contractor’s performance to a longer-than-expected learning curve. Also, taxpayers’ raised concerns regarding privacy, although no confidential information is shared in answering tax law questions. In September 2004, IRS officials decided not to go forward with further testing.

The second pilot was for contact recording, which involves recording all telephone contacts between taxpayers and CSRs and, for 10 percent of the calls, also capturing computer screen displays accessed by the CSR. It is intended to enable supervisors to provide CSRs with more complete feedback on their performance. Figure 5 illustrates the process for contact recording.

IRS conducted the contact recording pilot from January through April 2004 at three call sites. According to IRS officials and our interviews with CSRs, CSRs liked being able to hear and see how they handled calls. In September 2004, IRS officials told us that they had decided to implement contact recording at all call sites by the end of the 2005 filing season.

Taxpayer Use of IRS Walk-in Sites Continued to Decrease While Use of Volunteer Sites Increased; Quality Data Are Limited

The total number of taxpayers visiting IRS walk-in sites continued to decrease while those having their returns prepared at volunteer sites increased. Available data raise questions, however, about the quality of services provided at both walk-in and volunteer sites. IRS has initiatives under way intended to improve the quality of data, though implementation may not be ready for the 2005 filing season.

Number of Taxpayers Visiting IRS Walk-in Sites Decreased While Number At Volunteer Sites Increased

Based on the data obtained from IRS and shown in figure 6, the total number of taxpayers seeking assistance at IRS sites declined an average of over 8 percent per year between 2001 and 2004. IRS officials attributed the overall decrease to taxpayers’ use of more convenient means to obtain services, such as IRS’s toll-free telephone lines and Web site. Taxpayers seeking return preparation assistance at walk-in sites decreased an average of 26 percent per year between 2001 and 2004.

In contrast, since 2001, the number of taxpayers seeking return preparation assistance at volunteer sites increased an average of 19 percent per year. During the 2004 filing season, taxpayers had over five times more returns prepared at volunteer sites than at IRS walk-in sites. These divergent trends reflect IRS’s strategy to shift return preparation to sites staffed by volunteer and community-based coalitions that are overseen by IRS. IRS has encouraged the shift by advertising the locations of these sites.

The shift of taxpayers from walk-in to volunteer sites is important because it has transferred some time-consuming services, such as return preparation, from IRS to volunteer sites. It also enabled IRS to shift more taxpayers to its telephone and Web site services, allowing it to concentrate on services at walk-in sites that only IRS can provide, such as account assistance or compliance work (see app. 2).

Limited Data Raise Questions About the Quality of Services at Walk-in and Volunteer Sites

While shifting taxpayers from IRS walk-in sites to volunteer sites has the advantage of freeing up some IRS resources, IRS has limited performance measures and data on the quality of tax law assistance, account assistance, timeliness, and return preparation provided at either type of site. We have noted in prior filing season reports that this raises concerns about quality and oversight.

Tax Law Assistance: Both TIGTA and IRS reported that IRS had not reached its goal of 80 percent accuracy at the walk-in sites they visited. Since the sites were selected judgmentally, the results cannot be projected to all sites.

Account Assistance: During the 2004 filing season, IRS did not measure account assistance accuracy at its walk-in sites. According to IRS officials, the focus on tax law accuracy diverted staffing resources from gathering data on account assistance accuracy.

Timeliness: IRS also did not measure timeliness, although GAO has recommended that IRS re-adopt a timeliness measure for its walk-in sites, stating that the presence of a quality measure should provide balance and a disincentive for employees to ignore quality in favor of timeliness.

Return Preparation: The utility of the current measure for accuracy of return preparation assistance provided at walk-in and volunteer sites is limited, because it narrowly defines accuracy. It counts a return as accurate only if no calculation errors or other obvious factual errors, such as omitted or inconsistent data, are identified on the return. In addition, the results of recent TIGTA audits raise questions about the accuracy of return preparation assistance at both walk-in and volunteer sites.

IRS Has Initiatives Under Way Intended to Better Measure Quality at Walk-in and Volunteer Sites Though Implementation May Not be Timely

IRS has initiatives under way intended to better measure the quality of key services at walk-in and volunteer sites. Key parts of both the walk-in and volunteer site initiatives that were scheduled for implementation in 2005, have experienced delays, have important details to be determined, and may not be implemented on schedule. The initiative for walk-in sites has the following four components.

Embedded Quality provides a standardized checklist for managers to measure the accuracy, professionalism, and timeliness of employee responses to taxpayers. Initially under Embedded Quality, a manager will directly observe the employee/taxpayer interaction. However, this could yield biased data, because employees will know they are being observed, which could influence their behavior. Consequently, Embedded Quality data gathered by direct observation may not be representative of true performance.

Contact Recording will replace direct observation as the method for gathering data on Embedded Quality. Under contact recording, the IRS employee/taxpayer interactions will be recorded and a random sample assessed using the Embedded Quality checklist. A pilot was scheduled to begin in August 2004. According to IRS, as of September, the Department of Treasury has not yet approved the pilot. It is unlikely the pilot will begin until January 2005. Since the pilot and evaluation are planned to take 3 months, it is also unlikely that contact recording will be fully implemented until well into the 2005 filing season.

Q-Matic is an automated system that keeps track of such things as customer wait-time, assistance provided, and staff time used. As of September 2004, Q-Matic implementation is proceeding on schedule.

Performance-based individual learning (E-Learning) is a training component that will be used to identify and address deficiencies.

Until contact recording replaces direct manager observation as a means of gathering data, IRS may have biased data on the quality of its walk-in services. Such biased data has significant limitations for drawing conclusions regarding performance and for making comparisons to other years. This in turn creates difficulties for managers trying to identify problems and make improvements to service. Furthermore, until Embedded Quality and contact recording are implemented together for a full filing season, assessing quality at walk-in sites will be based on two different data collection methods, thus limiting comparisons.

At volunteer sites, IRS plans to implement the following; Quality Assurance is an initiative where IRS, working with volunteer and community-based coalitions, is developing quality standards and a means of monitoring the quality of return preparation services. This is consistent with an earlier recommendation we made for IRS to develop performance measures for volunteer sites to help ensure that taxpayers were receiving an adequate level of service. IRS planned to implement the initiative for the 2005 filing season. However, as of September 2004, IRS had missed its milestones for developing guidelines for monitoring volunteer sites, and was still developing and revising its implementation plans, revising its schedule, and determining important details, such as how and when volunteer sites will be monitored and how quality will be measured.

We are concerned that the Quality Assurance initiative may not be implemented in time to measure performance for the 2005 filing season. As with IRS’s initiative for its walk-in sites, until Quality Assurance is fully implemented, IRS will continue to have limited and potentially unreliable information on the quality of return preparation at volunteer sites for the 2005 filing season. As a result, IRS officials have less information available when making decisions about the role of volunteer sites and how IRS should support them.

Use of IRS’s Web Site Increased, But Concerns Exist About a Feature for Answering Tax Law Questions

IRS’s Web site is important because it provides taxpayers and tax practitioners with customer service without having to directly contact IRS employees. Although overall Web site usage increased over last year, we have some concerns about IRS’s performance answering tax law questions.

Web Site Use Increased and the Site Was User Friendly and Highly Rated

IRS’s Web site usage increased in 2004, continuing a trend as shown in table 2. Further, there was extensive use of the “Remember Your Advanced Child Tax Credit” feature that was new in 2004.

Overall we found that IRS’s Web site was user-friendly and generally easy to access and use. For example, based on our knowledge of the type of information taxpayers look for, we found (1) no broken links or outdated or inconsistent data; (2) facts and information were logically arranged and easy to obtain; (3) with few exceptions, search functions guided us to appropriate forms, publications and information; and (4) response time was quick. However, we still have concerns about the feature answering tax law questions.

Two independent assessments done by Keynote and Brown University’s Center for Public Policy confirmed our observations on IRS’s Web site.

Keynote, an independent Web site rater of Internet performance, reported that IRS’s site performed very well. Keynote reported that, for the average delivery time to download to IRS’s Web site homepage, IRS was in the top 10 out of 40 government agencies measured for 12 of 15 weeks during the filing season. It also reported that, during the filing season, IRS’s response time was consistent with other organizations being measured. Finally, Keynote reported that, when it comes to success rate (being able to access a desired location on the Web site) IRS was always at 99 or 100 percent for the filing season.

Brown University’s Center for Public Policy rated IRS’s Web Site 5th out of 60 federal government Web sites in providing service to citizens.

Performance and Use of Tax Law Assistance Feature Declined

The quality of IRS’s Electronic Tax Law Assistance (ETLA) feature, which enables taxpayers and practitioners to ask tax law questions via the Internet and receive an e-mail response from IRS, has declined. Usage has also declined, apparently by design.

IRS did not meet its 2004 goal to respond to e-mail questions within 2 business days. On average, IRS responded to e-mail questions in over 3 business days and only reached the 2 business day goal in 6 of the 27 tax law categories. Neither did IRS meet its accuracy goal. IRS’s performance data showed that IRS answered about 64 percent of the e-mail questions accurately, compared to its goal of 78 percent.

IRS did not meet its goals because of a mismatch between the number of questions from taxpayers and staff available to respond to the questions. At the beginning of the 2004 filing season, IRS increased the prominence of the ETLA feature. However, an IRS official told us that this resulted in the site receiving more questions than staff could handle. The official said that in response IRS moved the ETLA feature to a less prominent position on the Web site. In fact, in its current location, IRS does not expect taxpayers to be aware of the ETLA feature unless they stumble upon it accidentally while looking for other information on IRS’s Web site. As a result, the ETLA feature was used significantly less this year than last. In 2004, taxpayers and practitioners submitted about 90,000 tax law and procedural questions via the Web site, down from 153,000 in 2003, a 41 percent decrease. IRS officials have decided not to move the ETLA feature to a more prominent location as of October 2004.

Although the number of questions received from taxpayers via the Web site is small, when compared to the number of questions received over the telephone, providing accurate responses to these questions is particularly important. Not only do inaccurate and untimely responses disappoint the taxpayers asking the questions, IRS also runs the risk of widespread dissemination of inaccurate e-mail responses to other taxpayers.

The decisions about the prominence of the feature and staffing are related. Achieving timeliness and accuracy goals depends, in part, on recognizing that decisions about the prominence of the feature, which affect taxpayer demand, and decisions about staffing are related. If IRS is unwilling to devote significant staff to answering tax law questions, then the feature cannot be prominent on the Web site. If IRS believes the feature is worth making prominent, then there are implications for staffing. For the 2004 filing season, IRS’s decisions failed to recognize the relationship.

IRS Continues to Offer New Web Services

IRS continued to offer new services via its Web site. New services are popular with taxpayers, as shown by the increasing use of features, such as “Where’s My Refund?” shown in table 2. In 2004, IRS added the following customer service features for taxpayers and tax practitioners. “Remember Your Advanced Child Tax Credit” that allows taxpayers to check the amount of their child tax credit. “E- Services” which is a suite of Internet services for tax practitioners that is previously discussed in the processing section of this report.

Conclusions

IRS improved its filing season performance this year compared to last. More importantly, in many areas the improved performance is part of a trend that IRS is sustaining over time. IRS’s filing season performance is important because it affects over 100 million taxpayers. Taxpayers want a quick turnaround on their refunds; they want easy access to IRS’s telephone assistors if they have questions; and they want to instantly download forms and publications when they need them.

The improvements we found are the result of systematic, long-term efforts by IRS. Processing results have improved and resources have been saved because of IRS’s promotion of electronic filing, telephone access has improved because IRS implemented new call routing technology, and labor- intensive walk-in assistance is decreasing because of improvements to alternative services. IRS should be commended for its efforts to improve service.

At the same time, however, we have identified several areas that present opportunities for further improvement. IRS has limited performance measures and data with which to assess the quality of services at walk-in and volunteer sites, primarily because its initiatives for doing so are only partially implemented. IRS deserves credit for planning initiatives to address these data limitations. However, we are concerned that until the walk-in initiative is fully implemented, IRS will have biased quality data on walk-in service. Furthermore, the history of delays and incomplete plans for the walk-in and volunteer site initiatives leaves us unsure about when IRS will fully implement them. Until IRS fully implements these initiatives and gathers data on quality, it may not be able to effectively monitor and improve performance at its walk-in sites or volunteer sites and, as a consequence, could be risking its credibility among taxpayers who use the sites and the community-based coalitions that prepare returns at volunteer sites.

Finally, IRS failed to meet its goals for accuracy and timeliness of e-mail responses to tax law questions, at least in part, by failing to match taxpayer demand for the feature with staffing. The risk associated with providing inaccurate e-mail responses may be high because of the potential for widespread dissemination.

Recommendations

To address problems with the data for assessing the quality of services at IRS walk-in and volunteer sites, we recommend that the Commissioner of Internal Revenue direct the appropriate officials to recognize and disclose the limitations of the Embedded Quality performance data that will be obtained by direct management observation in 2005 when interpreting and reporting on service quality at walk-in sites; ensure that the causes of delays in implementing improved quality measurement at walk-in sites are addressed; and ensure that the delays with the development and implementation of the Quality Assurance initiative at volunteer sites are addressed.

With respect to the Web site’s ETLA feature, we recommend that the Commissioner recognize that decisions about the prominence and staffing to give the feature are related.

Agency Comments and Our Evaluation

The Commissioner of Internal Revenue provided written comments in a November 8, 2004, letter (see app. III). The Commissioner noted that the 2004 filing season was one of the best ever, with improved telephone service, timely and effective return processing, substantial increases in electronic filing, and a successful shift in the number of tax returns prepared in IRS walk-in sites to volunteer sites. The Commissioner said he appreciated that our report recognized IRS’s achievements for this filing season and over the past few years as well.

The Commissioner agreed with the importance of recognizing and disclosing the limitations of performance data obtained by managers directly observing employees in 2005. He also said that IRS has communicated the limitations in briefings with all levels of management and outside stakeholders, and will continue to do so. However, the Commissioner differs with our assessment of the extent of the limitations in the data. While he agreed that there may be some bias in the data because employees know that their managers are observing them, he disagreed with our subsequent finding that data obtained through this method may not be representative of true performance. However, as our report indicates, because of the potential for bias and absence of other data, we cannot determine if the observed performance is representative or not. Further, according to IRS officials, the accuracy rates compiled by the quality review staff and managerial reviews cited by the Commissioner are not based on statistically representative samples.

The Commissioner agreed with the recommendation to ensure that causes of delays in implementing improved quality measurement at walk-in sites are addressed. He said that while the delay in the implementation of contact recording as a means of collecting embedded quality data is attributable to the lengthy approval process, IRS expects to begin the contact recording pilot by January 2005 and is on target for post-pilot initial implementation for the last quarter of fiscal year 2005. Regarding volunteer sites, the Commissioner also agreed with the recommendation to implement quality initiatives in a timely manner and address delays.

The Commissioner agreed with the intent of our recommendation about the ETLA feature, but disagreed with our assessment of the cause. He agreed that it is important to recognize the relationship between the prominence of the feature and staffing, but disagreed that the decline in ETLA performance is attributable to inadequate recognition of this relationship. He stated that the ETLA feature was inadvertently placed in a more prominent location on IRS’s Web site, thus creating unexpected demand. However, inadvertent placement suggests that the IRS needs to be more deliberative in recognizing the impact that placement of this feature can have on demand and staffing.

We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Finance, the House Committee on Ways and Means, and the Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means. We are also sending copies to the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

This report was prepared under the direction of Joanna M. Stamatiades, Assistant Director. Other major contributors are acknowledged in appendix IV. If you have any questions about this report, contact me on (202) 512-9110.

Data on IRS’s Processing Performance Relative to Fiscal Year 2001-2003 Performance and Fiscal Year 2004 Goals

As table 3 shows, the Internal Revenue Service (IRS) nearly met or exceeded seven out of the eight processing performance goals in 2004. For four measures (i.e., deposit error rate, deposit timeliness, refund interest paid, and productivity), IRS exceeded its goals. For two of the measures, IRS met their goals. For the remaining two, IRS missed its goals by a statistically significant amount. In the case of refund timeliness, however, the point estimate of 98.2 percent, nearly met the goal of 98.4 percent. In the case of letter error rate, the point estimate was 7 percent compared to the goal of 6.2 percent—13 percent greater than the 2004 goal.

Comparing actual 2004 performance to 2003 shows that IRS’s performance improved or remained about the same for six out of the seven measures that could be compared. Table 3 also shows that IRS’s processing performance in 2004 has generally improved in comparison to 2002 and 2001 for the measures that could be compared.

IRS Spends Thousands of Staff Years on Filing Season Activities

IRS’s performance during the filing season has significant budgetary implications because IRS spends thousands of staff years on its key filing season activities. used for key activities related to processing individual tax returns between fiscal years 1999 and 2003. The number of staff years used for key processing activities such as data transcription and correcting errors has decreased over 17 percent during this period. Beginning in fiscal year 2001, IRS separated the processing of individual and business tax returns and began consolidating paper processing centers. IRS officials expect additional savings when it further consolidates processing paper operations in Memphis, Tennessee in 2005.

The source of data for this appendix is IRS’s time and attendance systems, the output of which is used to calculate IRS’s payroll expenses. IRS reports these payroll expenses annually in its Statement of Net Cost, the reliability of which GAO tests as part of our audits of IRS’s financial statements. These audits have concluded that for the fiscal years ended September 30, 2000 through 2003, IRS’s Statement of Net Cost was reliable. See GAO, Financial Audit: IRS’s Fiscal Years 2004 and 2003 Financial Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004). Therefore, the data is likely to be reliable to show trends over time.

Data for fiscal year 2004 were not available.

Table 5 shows that IRS has consistently directed over 8,000 staff years to CSRs answering toll-free telephone calls that are not routed to automated services.

The total staff years used for walk-in service has increased slightly between 2001 and 2003, ranging from 2,121 in fiscal year 2001, to 2,208 in fiscal year 2002, and 2,256 in fiscal year 2003.

However, the time IRS spent directly on return preparation assistance at walk-in sites during the filing season has decreased significantly. As the demand for walk-in assistance has declined, IRS has assigned walk-in staff other responsibilities such as working on compliance cases. Figure 7 shows that direct Full-Time Equivalents decreased 62 percent for time spent directly (not counting overhead) on return preparation services between 2001 and 2004.

At the same time, IRS reduced its reliance on compliance staff at walk-in sites. For years, IRS detailed staff from its compliance functions, such as Examination and Collection, to help provide walk-in assistance during the filing season. IRS has now limited the number of such details. IRS reduced the number of compliance Full-Time Equivalents detailed to assist at walk- in sites from 244 in the 2001 filing season to 9 in the 2004 filing season.

Comments from the Internal Revenue Service

GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

In addition to those named above, Tiffany Brown, James Cook, Larry Dandridge, Evan Gilman, John Lesser, Karen O’Conor, Neil Pinney, and Amy Rosewarne made key contributions to this report.

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