2010 Tax Filing Season: IRS's Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others
Released: 2011-01-18T00:00:00

Letter

Scope and Methodology

To meet our objective we took the following steps: Reviewed and analyzed IRS documents and data, including performance and workload data, reports, testimonies, budget submissions, and compared these to IRS’s goals and past performance to identify trends and anomalies.

Reviewed various criteria, including industry standards, federal requirements, and best practices, to assess IRS’s performance in key areas.

Reviewed information from other organizations that compile data pertinent to our objectives, such as the ForeSee Results IRS Satisfaction Insight Review, which evaluates customer satisfaction with Web site performance. Interviewed IRS officials responsible for tax return processing, taxpayer services, and examination and compliance activities. Interviewed external stakeholders who frequently interact with IRS on key aspects of the filing season, including representatives of a customer service trade organization, to identify customer service benchmarks and best practices, and representatives from major tax preparation firms and organizations.

Observed operations at IRS’s Joint Operations Center (which manages telephone services) and listened to calls from taxpayers with telephone assistors. We also viewed operations at one of IRS’s walk-in sites and Submission Processing Center in Atlanta, Ga. We selected these particular offices for a variety of reasons, including the location of key equipment and IRS managers.

Reviewed Treasury Inspector General for Tax Administration (TIGTA) reports and interviewed TIGTA officials about IRS’s performance and initiatives.

When data were available, we compared IRS’s 2010 performance to its performance from fiscal years 2005 through 2009. IRS officials noted that tax law changes affected performance during fiscal years 2008 and 2009 as compared to 2005 through 2007, when tax law changes were not as significant.

This report discusses numerous filing season and performance measures and data covering the quality, accessibility, and timeliness of IRS’s services. To the extent possible, we corroborated information from interviews with documentation and data and where not possible, we attribute the information to IRS officials. We reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to our standards of data reliability. Data limitations are discussed where appropriate. We consider the data presented in this report to be sufficiently reliable for our purposes. We conducted our work primarily at IRS headquarters in Washington, D.C. and at the Wage and Investment Division headquarters in Atlanta, Ga. as well as other sites mentioned earlier.

We conducted this performance audit from February 2010 through December 2010 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 objective.

Background

Each year during the filing season IRS accepts individual income tax returns electronically and on paper, processes the returns, and validates key pieces of information. A growing majority of taxpayers file their individual tax returns electronically.

IRS uses the legacy Individual Master File (IMF) and current Customer Account Data Engine (CADE) to process individual income tax returns. IRS plans to eventually shift all return processing to a new system called CADE 2, which is intended to facilitate faster refund processing and other benefits, such as providing IRS with more up-to-date account information and more timely responses to taxpayer inquiries.

IRS is also replacing its legacy electronic filing (e-file) system with the Modernized e-File (MeF) system. IRS cannot accept electronically filed returns directly from taxpayers. Rather, IRS-authorized e-file providers transmit returns to IRS electronically. Return transmitters send electronic return data directly to IRS using either the MeF or the legacy e-file system. The MeF system is intended to accept or reject individual tax returns faster than the legacy system. In addition, if the return is rejected, the MeF system should provide better information regarding why the return was rejected. s The MeF system is also intended to allow taxpayer to attach portable document format (PDF) files to their tax returns, which will be useful in instances where taxpayers are required to submit additional documentation, such as for the FTHBC. Finally, MeF serves a single point of submission for federal and state tax return information. I is planning to fully implement the MeF system in time for the 2012 filin g season, and retire the legacy e-file system in October 2012.

As in the last few filing seasons, in 2010, IRS administered complex tax law changes, including the MWP and Residential Energy Property Credits—part of the American Recovery and Reinvestment Act of 2009 (ARRA)—and the FTHBC.

The refundable MWP tax credit provides up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. Individuals who received Social Security, Railroad Retirement, or Veteran’s benefits received a $250 Economic Recovery Payment in 2009, which reduced the amount of the MWP credit they were eligible to receive.

The Residential Energy Property Credit increases the existing credit rate to 30 percent of cost up to a maximum credit of $1,500 for homeowners who make certain energy efficient improvements to existing homes.

As we have previously reported, since 2008, Congress has enacted three versions of the FTHBC to help stimulate the housing market by providing first-time homebuyers and some long-term homeowners with a refundable tax credit to assist with the purchase of a home.

Appendix II summarizes key tax law changes that affected recent filing seasons.

Part of IRS’s filing season work involves correcting errors on tax returns, which can benefit both IRS and taxpayers. Correcting errors before issuing refunds allows IRS to avoid costly and burdensome audits and taxpayers may receive larger refunds or be made aware of additional taxes owed before being required to pay interest and penalties.

For example, IRS used math error authority (MEA) to identify and correct errors with the FTHBC. MEA allows IRS to identify calculation errors and check for obvious noncompliance, such as claims above income and credit limits. These automated and relatively low-cost (compared to audits) math error checks increase the likelihood of IRS collecting the correct amount of tax owed. Congress must grant IRS specific authority to use MEA for purposes beyond computational errors. We previously recommended that Congress broaden IRS’s MEA with appropriate safeguards to prevent its misuse.

In addition to processing tax returns, IRS also provides tax law and account assistance, limited return preparation, tax forms and publications, and outreach and education, primarily through its telephone services, Web site, and, to a much lesser extent, through face-to-face assistance. For example, 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 $49,000 or less. IRS also has volunteer partners that staff over 12,000 volunteer sites, which help serve traditionally underserved taxpayer segments, including elderly, low-income, and taxpayers with limited English proficiency. Continued improvements to telephone service and IRS’s Web site could help reduce the demand for taxpayer service at walk- in and volunteer sites.

Electronic Processing Continued to Increase, but Some Refunds Were Delayed as a Result of IRS Correcting Millions of Taxpayer Errors

The number of tax returns IRS processed in 2010 declined by about 2 percent from the prior year, as shown in table 1. However, electronically filed returns continued to increase, reaching 71 percent of all returns. As we have previously reported, electronic filing is important because it allows taxpayers to receive refunds faster, is less prone to transcription and other errors, and provides IRS significant cost savings. For example, for fiscal year 2009, IRS reported that it costs 19 cents to process an e-filed return compared to $3.29 for a paper return.

Table 1 also shows that IRS issued about 2 percent fewer refunds in 2010 compared to 2009, with the average refund amount being about $2,915. In all, IRS issued about $312 billion in refunds during the 2010 filing season.

IRS processed about the same number of returns on current CADE as it did in 2009 (just over 41 million). In 2012, IRS plans to establish and use the new CADE 2 database in conjunction with their legacy system for daily processing of individual taxpayer accounts. Current CADE processes returns about 1 to 8 days faster than the legacy system, and at present, only taxpayers whose accounts have been moved to that system get this benefit (i.e., about 30 percent of all individual returns). Although IRS once intended for current CADE to replace the legacy system, this is no longer the case. Rather, beginning in the 2012 filing season, IRS plans to introduce daily processing for most returns using the legacy system and the new CADE 2 database. At that time, IRS officials expect that the majority of individual taxpayers will receive the benefit of faster refunds in addition to other benefits.

Although IRS began using MeF to accept individual returns for the first time in 2010, the system was underutilized. Return transmitters submitted about 7 percent of the total number of returns that IRS officials projected the MeF system could accept. IRS officials cited several reasons for lack of use of the MeF system, including that it is unproven compared to the current legacy e-file system. They also noted that the legacy e-file system had a lower rejection rate than MeF and return transmitters may have stopped using MeF after encountering performance problems. In interviews with GAO and in a survey conducted by the Electronic Tax Administration Advisory Committee, a group of stakeholders that offers suggestions about current or proposed electronic tax administration policies, industry stakeholders who are major users of electronic filing cited MeF system “instability” (system down-time, time- outs, slow servers, and delayed acknowledgments) as a major reason for low use of the MeF system.

For the 2011 filing season, IRS officials expect that the MeF system will be capable of accepting up to about 85 million individual returns. However, IRS officials acknowledged that until IRS overcomes the performance and stability issues experienced in 2010, transmitters are likely to continue to send Form 1040 returns to the legacy electronic filing system. Transmitters may still be reluctant to switch to MeF until the system is proven to be stable, and their participation is still voluntary until the legacy system is turned off in 2012. To ensure that issues with the stability of the system do not persist in 2011, IRS officials are testing the MeF system in preparation for next year. IRS officials expect that by 2012, when the legacy system is scheduled to be turned off, MeF should be able to accept all individual returns filed electronically.

IRS Corrected Millions of Taxpayer Errors, Resulting in More Taxpayers Experiencing Delays Receiving Refunds

IRS corrected a large number of taxpayer MWP errors and identified returns with residential energy credits using its Error Resolution System (ERS) this filing season. In addition, IRS applied filters for pre-refund examinations on certain FTHBC returns. IRS officials said that the combined effect of these actions resulted in longer processing times in general—not just for returns with MWP errors or FTHBC claims.

In total, about 26 million returns, or about 20 percent of all returns processed, went to ERS this year. IRS officials said it generally takes approximately one week to correct returns in ERS; however, between March and May of 2010, it took up to two weeks to process these returns. Appendix III describes in more detail the large number of returns sent to ERS this filing season.

Correcting returns benefited either taxpayers or IRS. For example, IRS corrected millions of MWP errors in favor of taxpayers, meaning taxpayers received larger refunds (or had a lower balance due) than they anticipated when they filed their return. In addition, applying filters for pre-refund examinations allowed IRS to prevent millions of dollars from being issued for ineligible FTHBC claims. Although applying these filters often results in IRS identifying incorrect refunds, we have previously reported that in some cases the filters applied were not sufficient to stop incorrect refunds from being sent to taxpayers.

In part due to these complications, IRS’s timeliness in issuing refunds declined by 3 percentage points, marking its lowest level since at least 2005. According to our calculations, this translates to about 3.3 million more refunds being delayed through August 2010 compared to last year. Delays in providing refunds adversely affect taxpayers because it takes longer for them to receive their refunds and contributes to taxpayer calls about the status of their refunds. In addition, IRS paid significantly more interest on those refunds than in previous years, which imposed additional costs to the federal government. For example, IRS paid about $12.6 million in refund interest through August 2010, about $8 million more than in 2009. On the other hand, rapid processing of refunds without proper checks can lead to erroneous refund payments which can be costly to the federal government. Recovering erroneous refunds also imposes additional burdens on taxpayers.

Finally, although IRS missed its fiscal year goals for refund timeliness and refund interest paid, IRS met four key processing goals—correspondence error rate, deposit error rate, productivity, and refund error rate. Appendix IV defines and summarizes IRS’s processing performance compared to goals from 2005 to 2010.

IRS Exceeded Some 2010 Telephone Service Goals, but Timeliness Is Not Included in Paper Correspondence Goals and IRS Could Do More to Improve Service

The percentage of callers seeking live assistance who actually received it—referred to as IRS’s Customer Service Representative Level of Service (LOS)—improved to 76 percent in 2010 as compared to the previous 2 years, as shown in table 2. However, taxpayers waited almost 10 minutes on average to speak with a phone assistor in 2010. This is the longest average wait time since at least 2005, and IRS officials attribute it in part to an increase in the number of calls from taxpayers inquiring about their individual tax account. Taxpayers’ access to phone assistors in 2010 was below the levels from 2005 through 2007 and, although IRS met its goals in 2010, the goals were lower than any previous year since before 2005. IRS’s LOS goal for 2010 was 11 percentage points lower than from 2005 through 2008.

As in 2008 and 2009, IRS continued to receive millions of calls related to tax law changes, including for the FTHBC and MWP. From February 8 through June 30, 2010, calls about these two credits accounted for 9 percent of IRS’s telephone services. In response to MWP calls, in March 2010, IRS introduced an automated application to reduce the number of taxpayers needing to talk to a live assistor.

IRS received 77 million telephone calls during the 2010 filing season, about the same as in 2009, as table 3 shows. IRS’s automated phone system answered about 25 percent more calls compared to 2009, which is due in part to a new automated phone service which enables taxpayers to request their electronic filing personal identification number (PIN), as well as a 16 percent increase in the use of the refund automated application. IRS phone assistors answered about 24 million calls at a cost, according to IRS officials, of about $25 per call, or about $600 million from January 1 through June 30, 2010. IRS responded to these calls using 24 call centers with about 5,300 full-time equivalents (FTE).

The accuracy of IRS’s telephone assistors’ responses to tax law and account-related questions was about the same as last year and exceeded IRS’s fiscal year 2010 goals, as shown in table 4. IRS officials attribute continued levels of accuracy to a number of factors, such as the use of automated assistance tools and targeted training of assistors.

IRS Does Not Have a Customer Service Telephone Standard

The decline in IRS’s live telephone assistance goal from 82 percent in 2005 through 2008 to 71 percent in 2010 raises questions about what constitutes good customer service. Executive Order 12862 instructs federal agencies to establish and measure performance against customer service standards, which are to be equal to the quality of service offered by private organizations providing a comparable service. A related Presidential Memorandum introduced in 1995 and still in effect also notes that customer service standards should reflect customer views. In addition, we have reported that performance data should be used to identify and analyze the gap between an organization’s actual performance and desired outcomes, including by setting performance benchmarks to compare an organization with private organizations that are thought to be the best in their field.

IRS sets an annual goal for LOS performance based on resource availability, the expected number and complexity of calls, and anticipated volume of taxpayer correspondence, and subsequently determines weekly and other performance targets to achieve its annual goal. IRS’s LOS goal would differ from a customer service standard in that it measures what IRS management determines is attainable given current resources and expected call volume, compared to defining standards based on the quality of service provided by comparable organizations and on what matters most to the customer—in this case, taxpayers.

According to IRS officials, they would be able to determine a customer service telephone standard and could provide cost estimates to achieve the standard. Once set, however, IRS officials identified several challenges to meeting such a standard, including: the potential need for additional resources; the need to balance resources between telephone services, other taxpayer services, and enforcement activities; unexpected changes in agency priorities which require the flexibility to shift resources to respond; and potentially significant fluctuations in call volume, including those resulting from tax law changes.

IRS officials expressed concern that developing a customer service telephone standard could create the expectation that the agency would achieve that standard each year, even when resources, call volume, and other priorities may make the standard unattainable. This could be the case even if the annual goal is set at a level that is attainable. However, as noted above, a customer service standard is something to strive for and is different than an annual performance goal. Adding a customer service telephone standard would make the gap between the standard and annual performance goals transparent. Further, it could help IRS communicate its resource needs and help Congress make more informed decisions about IRS’s budget.

IRS’s Frontline Telephone Staff Are Not Consistently Consulted to Help Identify Solutions for Taxpayer Services

According to senior IRS officials, IRS has a process that includes holding regular team meetings to solicit ideas from frontline phone assistors about how to improve service. For example, the meetings are intended to help managers identify trends in call topics that might benefit from further research about the source of taxpayer confusion that could lead to finding less costly ways to provide assistance. However, we identified several gaps in this process. Specifically: Staff responsible for analyzing IRS’s telephone calls using a research tool called Contact Analytics said determining appropriate search terms to effectively identify calls from taxpayers is one key challenge to using the system. This is something that could be improved by using frontline employees to identify search terms or trends in call topics.

Managers and frontline phone assistors with whom we met considered the process to be informal where phone managers would note some issues to more senior management.

According to IRS officials responsible for phone services, IRS did not consult with frontline phone assistors to obtain input on taxpayer call topics when reviewing call trends and adding an additional telephone service line for 2010.

The telephone service industry considers holding regular meetings with experienced phone assistors to identify trends in call topics to be a key element in improving service. By not consistently using existing processes to solicit input from IRS’s frontline employees to identify issues for further research, including contributing ideas for Contact Analytics, IRS may miss areas of importance to taxpayers which could improve taxpayer service.

IRS Stores Calls for 45 Days, Which May Not Be Long Enough to Complete Data Analysis

Contact Analytics allows IRS to search recorded interactions between taxpayers and IRS assistors to enhance the taxpayer’s experience by gaining a better understanding of the reasons taxpayers call IRS and identifying opportunities for cost savings or efficiency gains. However, Contact Analytics is not used to access phone calls older than 45 days. According to an IRS official, the current 45-day limit causes IRS’s business units to use more time-consuming processes to analyze calls for proposed improvements to IRS’s telephone operations. For example, as part of their planned review of refund inquiry calls received during the 2010 filing season, IRS officials explained they used an alternative system to listen to calls because they needed to review data for several months of the filing season, a period that extended beyond the 45 days available through Contact Analytics.

According to officials with IRS’s Contact Analytics office, IRS is only able to store recorded calls for 45 days because of the expense of storing the calls and limited storage space. Separately, IRS officials responsible for recording and storing calls explained that IRS developed its policy on the length of time to store data, including calls available for analysis through Contact Analytics several years ago. IRS officials acknowledged they have not surveyed the business units as to whether they need to store the recorded calls for a longer period or analyzed whether the benefits of storing the calls longer would exceed the costs.

IRS Does Not Have Performance Measures to Assess the Timeliness of Its Taxpayer Correspondence Services

IRS’s frontline assistor staff is trained to respond to both telephone inquiries and taxpayer correspondence. IRS shifts staff between these two areas based on the volume of work and resource availability. For fiscal year 2010, IRS dedicated about 5,800 FTEs to taxpayer correspondence and, as we noted earlier, about 9,400 FTEs to telephone service. IRS received about 20 million letters, forms, and other types of taxpayer correspondence in 2010, a slight increase as compared to 2009 and a 25 percent increase compared to 2007. Compared to earlier years, such as 2005, the average percentage of taxpayer correspondence overage has increased significantly, as shown in table 5, which IRS officials attribute to legislative tax law changes and a corresponding increase in the volume of amended returns.

Amended returns make up a significant portion of IRS’s taxpayer correspondence work and IRS has processed an increasing number of amended returns since 2005, due in part to taxpayers’ taking advantage of tax law changes. Taxpayers are not able to file amended returns electronically, which leads to increased processing time for taxpayers and added expense for IRS.

For many of its processes, IRS has established performance measures to make managers and frontline staff more accountable for improving performance. As we previously reported, performance measures should provide a clear link to organizational priorities to provide useful information for decision making. Since one measure may not encompass the entire performance of a program area, IRS’s balanced measures include measures to assess employee satisfaction, customer satisfaction, and business results. The business results measures generally take into account both the quality and quantity, or productivity, of IRS’s work.

As we previously mentioned, IRS has a number of balanced performance measures to monitor the productivity of its business results for telephone service, including average wait time and the percentage of callers seeking live assistance who actually receive it. In all, IRS has five balanced performance measures that address the productivity of its telephone service. IRS has one taxpayer correspondence performance measure that addresses productivity—customer accounts resolved. However, this measure does not account for the timeliness of its correspondence services to taxpayers, which is one of IRS’s organizational priorities. IRS currently measures the timeliness of the employee’s work. However, this measure does not evaluate the time a taxpayer waits for a response.

According to IRS officials, IRS uses a number of indicators to monitor its taxpayer correspondence workload, including size of inventory and weekly closures, and make workforce management decisions. In addition, a number of these indicators assess the timeliness of IRS’s response to taxpayers. For example, IRS indicators show that for 2008 and 2009, on average, 23 to 25 percent of IRS’s taxpayer correspondence portfolio has been overage, while in 2010 the percentage overage increased to 27 percent. IRS management uses the percentage overage indicator, among others, to make weekly workforce management decisions, including the allocation of staff between telephone service and paper correspondence. For example, IRS has a computer program that helps IRS officials balance telephone and paper inventories and allocate staff between those two areas.

IRS recognizes that providing timely taxpayer correspondence service is its highest improvement opportunity for paper inventory. However, without elevating timeliness to taxpayers as part of its suite of balanced performance measures for taxpayer correspondence, IRS management risks prioritizing telephone or other services, for which such measures already exist, over providing timely taxpayer correspondence. Balanced performance measures are recognized agency priorities and are communicated as such to frontline staff. The lack of balanced performance measures addressing the timeliness of IRS’s response to taxpayers may explain, in part, why such a large percentage of IRS’s taxpayer correspondence is overage. This is particularly important as IRS makes trade-offs between providing telephone service and responding to taxpayer correspondence.

Ensuring the timeliness of IRS’s response to taxpayer correspondence directly reduces the volume of calls made to IRS’s telephone services, which can represent significant annual cost savings as phones represent one of the most expensive forms of taxpayer services.

Visits to IRS’s Web Site Increased and IRS Is Taking Steps to Improve Taxpayer Satisfaction

Visits to IRS’s Web site continue to increase, and in particular, the use of automated services like “Where’s My Refund?” is substantially higher than in 2007, as table 6 shows. Specifically, IRS piloted four new automated Web services in 2010. According to IRS officials, these automated services are designed to reduce calls to phone assistors by providing alternative channels for taxpayers to access information: the Did I Receive a 2009 Economic Recovery Payment? application, which determines whether the taxpayer received the $250 stimulus payment in 2009; the Electronic Filing Personal Identification Number (PIN) application, which enables taxpayers to request their PIN to sign and file their return electronically; Seven Interactive Tax Assistant topics, which use interactive question-and- response processes, similar to what is used by phone assistors, to answer taxpayer questions about common tax law issues such as filing status, standard deduction, and eligibility for the Child Tax Credit; and a state-by-state partial list of volunteer tax preparation sites with contact and availability information.

In the Taxpayer Assistant Blueprint (TAB), IRS’s 5-year strategic plan for improving service to taxpayers, IRS identified five Web site management control gaps and corresponding improvements that would allow IRS to maximize the opportunities to provide taxpayer service through its Web site. IRS has taken action to address some of these gaps. However, other gaps including those related to content management and usability reviews have not been fully addressed. We previously identified management controls as necessary to ensuring the effectiveness and efficiency of operations and the use of resources. IRS officials said that IRS is taking actions to address elements of these management control gaps such as development of new Web content management guidance and usability review guidance, which are expected to be in place by January 2011.

Ensuring effective management control for its Web site is especially important in light of IRS’s planned improvements. From January 1 through April 15, 2010, IRS’s 2010 taxpayer satisfaction survey results found that 73 percent of surveyed visitors to www.irs.gov reported that they obtained the information or services they were seeking, the same level as in 2009, but a 5 percent decrease compared to 2007. In response, IRS is taking steps to improve its Web site, including investing $320 million over 10 years to introduce a new site by the 2013 filing season. This $320 million is being used for Web operations, including a Web site help desk, development of interactive Web applications, and program management of IRS’s Web site and registered user and employee sites. According to IRS officials, the new Web site should provide IRS with a strengthened technical infrastructure that would allow for easier updates on the site and new automated features.

Accuracy at IRS’s Walk-In Sites Improved, but IRS’s Evaluation of the Debit Card Program at Volunteer Sites Is Missing Stakeholder Input

Through April 30, 2010, IRS received 2.8 million taxpayer contacts at its 401 IRS walk-in sites, about the same as last year. To increase taxpayer access to assistance, IRS piloted extended Saturday and evening hours in 16 IRS walk-in sites, held five Saturday open house events during the fiscal year, and expanded a pilot project to place IRS walk-in site employees in volunteer tax preparation sites to provide assistance with accounts and tax law questions. From January 1 through April 15, 2010, IRS employees worked with approximately 5,300 taxpayers at 27 volunteer sites. According to IRS officials, they plan to continue the programs in 2011.

As of April 30, 2010, the accuracy of accounts and tax law assistance provided at IRS walk-in sites continued to improve, as table 7 shows. IRS officials attribute this increased accuracy to the continued use of the Interactive Tax Law Assistant which guides assistors through a series of questions to provide accurate and consistent responses to taxpayers’ questions. Further, IRS introduced a new return preparation assistance accuracy measure, which assesses the extent to which IRS staff prepares accurate returns.

According to IRS officials, IRS partnered with community-based organizations that ran 12,326 volunteer sites, staffed with 87,602 volunteers in 2010. Through April 25, 2010, volunteers prepared 2.9 million tax returns, about the same as last year. Return preparation accuracy by volunteers increased compared to 2009. For 2010, volunteers achieved an 85 percent accuracy rate for return preparation compared to 78 percent last year. According to IRS officials, this increase resulted from IRS’s new requirement that volunteers use an IRS-approved intake sheet, expanded training of volunteers, and increased IRS monitoring visits. For more detail on the number of contacts at walk-in and volunteer sites, see appendix VI.

IRS is expanding its program to support its volunteer partners as they work with taxpayers to promote financial education and asset building. One initiative of this program is to assist taxpayers who may not have an account at a bank, savings and loan, credit union, or other financial institution, to receive their refund through direct deposit on a debit card issued by one of IRS’s national bank partners. IRS anticipates that these efforts may result in reduced taxpayer use of refund anticipation loans by providing taxpayers with a low-cost or no-cost refund option for receiving refunds quickly. In 2010, the program, which already had a low participation rate, drew far fewer taxpayers than in 2009, despite increasing the number of sites offering the cards from 15 in 2009 to 20 in 2010. Less than 3 percent of taxpayers eligible for the program elected to receive their refund on a debit card compared to 2009 when 8 percent of eligible taxpayers participated in the program.

According to IRS officials, poor program participation is in part due to the challenge of appropriately marketing the program to taxpayers. However, other factors may have contributed, including having a limited number of volunteers available to administer the program at volunteer sites and additional training requirements for volunteers distributing the cards. IRS included its partner bank institutions in its evaluation of the program’s 2010 performance, but the evaluation did not include other key stakeholders, such as taxpayers or partners from volunteer sites where the program was implemented. By not including these other key stakeholders, IRS may not have fully identified the causes of the program’s poor participation rate. As we have previously reported, according to the American Evaluation Association’s Guiding Principles for Evaluators, evaluations should include relevant perspectives and interests of the full range of stakeholders. IRS plans to continue to facilitate the program and is carrying out a study and pilot test to improve marketing of the debit card at volunteer sites. However, without an understanding informed by multiple stakeholder perspectives on reasons why taxpayer participation in the program was low, including reasons outside of the manner in which the program was marketed, IRS risks missing opportunities to increase participation.

Conclusions

The filing season is a large-scale, complex effort that requires IRS to balance resources across processing returns (including some pre-refund compliance verification) and providing assistance to taxpayers via telephones, mail, walk-in sites and IRS’s Web site. Although IRS dealt with a number of challenges this filing season, its performance improved in some areas and IRS met some goals. Efficiency gains realized from continued growth in electronic filing contributed to IRS’s performance.

However, the combined effects of recent tax law changes and changes in taxpayer behavior can be seen in the fluctuations in IRS’s performance— not just this year, but in previous years as well. During 2010, IRS’s performance in issuing timely refunds decreased—a result, in part, of correcting millions of taxpayer errors to the benefit of taxpayers and the federal government. In addition, telephone service, although better than last year, remained below 2005 through 2007 levels and IRS continues to have a significant amount of overage taxpayer correspondence. IRS management faces trade-offs in determining how to best allocate resources among these priorities. For example, when IRS dedicates more resources to providing quality telephone service, fewer resources are available to respond to paper correspondence and vice versa.

Opportunities exist for IRS to improve the information available to make decisions between competing priorities and to gain efficiencies. Establishing a customer service standard for telephone service would provide Congress with better information on the resources needed for IRS to deliver better telephone service. Further leveraging the use of powerful tools already in IRS’s arsenal—namely its own staff and data contained in Contact Analytics—should help IRS gain efficiencies. For example, assessing the costs and benefits of storing recorded calls for longer than the current 45-day period could help IRS use Contact Analytics to better determine why taxpayers call. Further, establishing a performance measure for the timeliness of its taxpayer correspondence should help IRS better manage its full range of interactions with taxpayers. Involving all key stakeholders in reviews of important initiatives, such as expanding the effort to provide refunds on debit cards, will lead to a more complete understanding of why such initiatives are or are not working.

Recommendations for Executive Action

To gain efficiencies and improve taxpayer service, the Commissioner of Internal Revenue should direct the appropriate officials to: 1. Based on the quality of service provided by comparable organizations and on what matters most to the customer, determine a customer service telephone standard, and the resources required to achieve this standard based on input from Congress and other stakeholders; 2. Use the existing process of regular team meetings with frontline telephone assistors to solicit information on call trends and other potential improvements to phone service and to supplement issues identified using Contact Analytics; 3. Assess business units’ needs for holding Contact Analytics calls beyond 45 days and store calls for this period or document that the costs of doing so exceed the benefits; 4. Establish a performance measure for taxpayer correspondence that includes providing timely service to taxpayers; and 5. Establish an evaluation plan for the 2011 filing season debit card program that includes taxpayers, volunteer site partners, and other stakeholders and assesses the full range of reasons for program participation rates.

Agency Comments and Our Evaluation

We provided a draft of this report to the Commissioner of Internal Revenue. We received written comments from the Deputy Commissioner for Services and Enforcement, which are reprinted in appendix I. IRS also suggested technical changes to the report, which we incorporated where appropriate.

In response to our draft report, the Deputy Commissioner expressed appreciation to GAO for recognizing IRS’s significant achievements in delivering the 2010 filing season despite the challenges presented by several complex tax law changes.

Of the five recommendations, the Deputy Commissioner agreed with two and, although he did not explicitly agree, he described steps IRS is taking to address a third recommendation. He disagreed with two recommendations.

The Deputy Commissioner agreed with the recommendation to use the existing process of regular team meetings with frontline telephone assistors to solicit information on call trends and other potential improvements to phone service and Contact Analytics. He also agreed with the recommendation to develop a performance measure for taxpayer correspondence that includes providing timely service to taxpayers. Further, in response to the recommendation that IRS establish an evaluation plan for the debit card program that includes taxpayers, volunteer site partners, and other stakeholders and assesses the reasons for program participation rates, he described steps IRS plans to take to assess the debit card program participation rates.

The Deputy Commissioner disagreed with the recommendation that IRS develop a customer service telephone standard, stating that he does not believe that IRS needs to revise its current process to measure telephone service at this time as it currently develops its telephone plans after consideration of many factors. Such factors include historical call demand and the types and anticipated lengths of calls. However, a customer service telephone standard would serve as a means of communicating to Congress and others what IRS believes would constitute good customer service. Having such a standard would make the gap between the standard and annual performance goals more transparent. We recognize that IRS may not be able to achieve the standard because of factors such as unexpected call volume and competing resources. The intent is to highlight for Congress and others the gap between good service and what IRS is able to attain. In addition, developing such a standard would put IRS in compliance with Office of Management and Budget guidance that requires agencies to develop customer service standards. Accordingly, we believe this recommendation remains valid.

Finally, the Deputy Commissioner disagreed with the recommendation that IRS assess its business units’ needs for holding Contact Analytics calls beyond 45 days and store calls for this period or document that the costs of doing so exceed the benefits. He stressed that IRS’s Contact Recording System is used to store calls and the Contact Analytics system is used to analyze some calls, noting that IRS is confident that storing calls beyond 45 days would not be a low-cost effort. However, IRS officials responsible for recording and storing calls told us that IRS developed its policy on how long to store data, including calls available through Contact Analytics, several years ago. As we note in our report, IRS officials acknowledged that they have not surveyed business units as to whether they need to store the calls for a longer period or analyzed whether the benefits of doing so would exceed the costs. Further, we identified an example during our review in which IRS needed to use more time-consuming processes to analyze calls because the calls were not available beyond 45 days for use by Contact Analytics. Contact Analytics should allow IRS to better understand the reasons taxpayers call. Because further analysis could demonstrate whether the benefits of storing calls for a longer period currently exceed the costs, we believe this recommendation remains valid.

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 key contributions to this report are listed in appendix VII.

Appendix I: Comments from the Internal Revenue Service

Appendix II: Selected Key Legislative Changes Affecting IRS’s 2007 through 2010 Filing Seasons

Description of legislation’s effect on filing season Extended many existing tax deduction provisions by 2 years. Late passage of the bill caused IRS delays in processing some returns.

One-time refund on the federal income tax return that can be requested by all individuals and entities that paid the telephone excise tax, regardless of whether they have an obligation to file a tax return.

Mandated that IRS send stimulus payments to over 100 million households based on taxpayers who filed a 2007 return. Taxpayers filing as single generally received $600 and married couples received $1,200. Many parents received an additional $300 for each qualifying child born after December 31, 1990.

Mortgage Forgiveness Debt Relief Act of 2007 (Pub. L. 110-142)

Allowed taxpayers to generally exclude from taxable income forgiven mortgage debt used to buy, build, or substantially improve a principal residence. In 2008 it was extended to qualifying indebtedness discharged by January 1, 2013. (Expanded by the Emergency Economic Stabilization Act of 2008 Pub. L. 110-343) (Provision of the American Recovery and Reinvestment Act of 2009, Pub. L. 111-5)

Taxable government bonds that are issued with federal subsidies for a portion of the borrowing costs delivered through (1) nonrefundable tax credits provided to the holders, or (2) refundable tax credits paid to state and local government issuers of the bonds.

1. (Provision of the Housing and Economic Recovery Act of 2008, Pub. L. 110-289)

1. Provided taxpayers a tax credit equal to 10 percent of the purchase of a home up to a maximum of $7,500. Taxpayers must repay the credit over 15 years beginning in the 2011 filing season.

2. (Provision of the American Recovery and Reinvestment Act of 2009, Pub. L. 111-5)

2. Provided taxpayers a refundable tax credit equal to 10 percent of a home’s purchase price up to $8,000. Taxpayers are still required to repay the credit if the home is resold or ceases to be the primary residence of the taxpayer within 3 years. (Provision of the American Recovery and Reinvestment Act of 2009, Pub. L. 111-5)

Allows eligible small businesses to apply certain losses experienced in 2008 against tax liability incurred in up to 5 previous years.

Allowed for taxpayers that did not receive their full stimulus payment in 2007 to receive the unpaid portion of the credit on their 2008 return. (Provision of the Economic Stimulus Act of 2008, Pub. L. 110-185) (Provision of the Worker, Homeownership, and Business Assistance Act of 2009 Pub. L. 111-92)

Extended the FTHBC from November 30, 2009, to April 30, 2010. Also allowed certain long time homeowners purchasing new homes to claim a tax credit up to $6,500.

Refundable tax credit providing up to $400 and $800, respectively, to working individuals and married couples filing joint returns. (Provision of the American Recovery and Reinvestment Act of 2009, Pub. L. 111-5)

Description of legislation’s effect on filing season (Provision of the American Recovery and Reinvestment Act of 2009, Pub. L. 111-5)

Increases the existing percentage of costs that can be claimed and maximum allowable credit available to homeowners who make certain energy efficient improvements to existing homes through December 2010.

Appendix III: IRS Continues to Process More Returns through the Error Resolution System

Figure 1 below shows that for the third consecutive year, the number of returns in the Internal Revenue Service’s (IRS) Error Resolution System (ERS) steadily increased. In 2008, IRS corrected many returns due to the economic stimulus package and telephone excise tax refund. Last year IRS corrected many returns due to the Recovery Rebate Credit and IRS said this year’s high inventory was due to Making Work Pay (MWP) errors and using ERS to identify returns on which taxpayers claimed certain credits, including the residential energy credit.

Through September 30, IRS had corrected about 7.7 million errors associated with MWP, which represents about one-third of all returns that went to ERS. Approximately 4.6 million of these taxpayers, or 60 percent, did not claim MWP and IRS computed the credit for them, according to IRS data through October 1. The remainder of these taxpayers made an error calculating the credit.

IRS officials took several actions this filing season which they believe helped reduce the ERS inventory, but a key automated tool was not ready when IRS processed most of the returns. Beginning in June 2009, IRS started developing an Integrated Automation Technology tool specifically to correct frequently recurring MWP errors. However, IRS had difficulties developing the tool and it was not available at all processing sites until June 18, 2010. By that time, IRS had already corrected approximately 5.6 million, or about 75 percent, of all MWP errors. In addition to creating the tool, IRS staff worked overtime, shifted resources among various submission processing functions, and hired and trained additional employees.

IRS also placed a large volume of returns in ERS from taxpayers claiming residential energy credits. However, these returns did not necessarily contain errors. Rather, IRS used ERS to transcribe information to identify the number of taxpayers claiming residential energy credits and the dollar amount. For the 2011 filing season, IRS officials told us the Residential Energy Credit will appear by itself on Form 1040, line 52 and the combined credits from Form 8396, Mortgage Interest Credit, Form 8839, Qualified Adoption Expenses, Form 3800, General Business Credit, and Form 8801, Credit for Prior-Year Minimum Tax, will be reported on line 53. IRS officials said the credits from Form 3800 and Form 8801 will be transcribed separately in the Integrated Submission and Remittance Processing system, eliminating the need for ERS to transcribe them. IRS officials said this system is faster and less expensive than ERS, but there was not enough time during the 2010 filing season to program the system for this purpose. To prevent sending as many returns to ERS next filing season, IRS officials told us they are updating forms and other materials using lessons learned from this filing season.

Appendix IV: IRS’s Processing Performance Relative to 2005 and 2010 Goals

As shown below in table 8, the Internal Revenue Service (IRS) met half of its performance goals, the fewest number of goals met since at least 2005. IRS met the fiscal year 2010 goals for correspondence error rate, deposit error rate, productivity, and refund error rate. The fiscal year goal for four measures were not met—refund interest paid, refund timeliness, deposit timeliness, and efficiency.

As noted earlier in the report, IRS officials attribute the combined effect of correcting millions of taxpayer errors and conducting targeted pre-refund compliance checks to missing goals for refund timeliness and refund interest paid. However, IRS also narrowly missed its goals for deposit timeliness and efficiency. IRS officials attributed missing deposit timeliness to an increased number of payments which generally had smaller dollar amounts. IRS officials attributed missing the efficiency measure goal to processing fewer information return Schedule K-1 documents than projected, and using more staff resources to process returns in ERS.

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

During the 2010 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 at the end of January and beginning of February and during the week of the filing deadline (see fig. 2 below). IRS saw relatively fewer busy signals or IRS initiated disconnect of taxpayers as compared with 2008 and 2009.

IRS’s Level of Service (LOS), or the percentage of callers seeking and receiving live assistance, takes into account a number of factors, such as the number of assistor calls answered, informational message calls answered, calculated busy signals, courtesy disconnects, and taxpayer hang-ups after being routed to a response line. According to IRS officials, other telephone call centers wait a certain period of time before counting callers who hang-up against their performance measures, whereas IRS counts these hang-ups, referred to as “secondary abandons” immediately.

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

The total number of contacts at walk-in sites, taxpayer assistance centers staffed by Internal Revenue Service (IRS) employees, and volunteer sites, where volunteers prepare tax returns, are about the same in 2010 as in 2009, but lower compared to 2008. As IRS expands automated taxpayer services online and over the telephone, the demand for face-to-face service is likely to decline. However, face-to-face services remain an important component of IRS’s efforts to serve many taxpayers as some taxpayers, particularly those with low incomes or limited proficiency in English, still require face-to-face assistance.

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Joanna Stamatiades, Assistant Director; Amy Bowser; James Cook; Tom Gilbert; Mark Kehoe; Kirsten Lauber; Blake Luna; Patricia MacWilliams; Sabrina Streagle; Jeff Wojcik; Jennifer Wong; and Benjamin Wories made key contributions to this report.