IRS’s key filing season efforts are processing electronic and paper individual income tax returns and issuing refunds, as well as providing assistance or services to taxpayers. As already noted, processing and assistance were complicated this year by three tax system changes: TETR, the split refund option, and enactment in December 2006 of tax law changes. From January 1 through March 30, 2007, IRS processed 76.8 million returns, about the same number as last year, and issued 68.3 million refunds for $163.4 billion compared to 66.7 million refunds for $154.4 billion at the same time last year. Over 69.3 percent of all refunds were directly deposited into taxpayers’ accounts, up 6.2 percent over the same time last year. Direct deposits are faster and more convenient for taxpayers than mailing paper checks. According to IRS data and officials, performance is comparable to last year. IRS is meeting most of its performance goals, including deposit error rate, which is the percentage of deposits applied in error, such as being posted to the wrong tax year. Groups and organizations we spoke with, including the National Association of Enrolled Agents, the American Institute of Certified Public Accountants, and a large tax preparation company, corroborated IRS’s view that filing season performance is comparable to last year. IRS uses two systems for storing taxpayer account information—the antiquated Master File legacy system and CADE. The latest release of CADE became operational in early March, 2 months behind schedule because of problems identified during testing. IRS had originally planned to post 33 million taxpayer returns to CADE and the remaining 100 million individual returns on the legacy system. However, as a result of the delay, officials expect to post approximately 17 -19 million taxpayer returns to CADE. Although this is significantly less than planned, it is almost two and a half times the approximate 7.4 million taxpayer accounts posted last year on CADE. Taxpayers eligible for a refund this year whose returns are posted to CADE will benefit from CADE’s faster processing, receiving their refunds 1-5 days faster for direct deposit and 4-8 days faster for paper checks than if their return had been processed on the legacy system. The remaining 14 – 16 million returns that were to have been processed on CADE were instead processed by the legacy system and thus did not receive the benefit of faster refunds. The CADE setback may impact IRS’s ability to deliver the expanded functionality of future versions of CADE, thus delaying the transition to the new processing system (discussed further in the BSM section of this testimony). The growth rate for electronic filing is up from the same period last year. As of March 30, over 56.9 million (74.1 percent) of all individual income tax returns were filed electronically. This is up 5.8 percent over the same time last year, and an increase over the previous years’ growth of 3.3 percent. We previously reported that state mandates for electronic filing of state tax returns also encourage electronic filing of both state and federal tax returns and last year, we suggested that Congress consider mandating electronic filing by paid tax preparers meeting criteria such as a threshold for number of returns filed. Last year, electronic filing of federal returns increased 27 percent for the three states (New York, Connecticut, and Utah) with new 2006 mandates. This year, state mandates are likely to continue to show a positive effect on federal electronic filing because, with the addition of West Virginia, 13 states now have state mandates. Compared to processing paper returns, electronic filing reduces IRS’s costs by reducing staff devoted to processing. In 2006, IRS used almost 1,700 (36 percent) fewer staff years for processing paper tax returns than in 1999, shown in figure 1. IRS estimates this saved the agency $78 million in salary, benefits, and overtime in 2006. Electronic filing also improves service to taxpayers. Returns are more accurate because of built-in computer checks and reduced transcription errors (paper returns must be transcribed in IRS’s computers—a process that inevitably introduces errors). Electronic filing also provides faster refunds. Although electronic filing continues to grow, taxpayers’ use of the Free File program continues to decline. The Free File program, accessible through IRS’s Web site, is an alliance of companies that have an agreement with IRS to provide free on-line tax preparation and electronic filing on their Web sites for taxpayers below an adjusted gross income ceiling of $52,000 in 2007. About 95 million (70 percent) of all taxpayers are eligible for free file. Under the agreement, companies are not allowed to offer refund anticipation loans and checks, or other ancillary products, to free file participants. Although IRS has increased its marketing efforts, the agency has not been successful in increasing free file use. As of March 17, 2007, IRS processed about 2.6 million free file returns, which is a decrease of 5.2 percent from the same period last year. While all 19 companies participating in the Free File program allow for TETR requests, only 3 of the 19 companies offer Form 1040 EZ-T requests. We recently reported to this Committee on states’ experience with return preparation and electronic filing on their Web sites. These systems, called I-file, provide taxpayers with another option for preparing and electronically filing their tax returns. To the extent that the I-file systems convert taxpayers from paper to electronic filing, the costs of processing returns are reduced. For the eight states we profiled, I-file benefits and costs were relatively modest. While state I-file systems generated benefits, such as increased electronic filing, the overall benefits were limited by low usage, which ranged from about 1 percent to just over 5 percent of eligible taxpayers. Restrictions on taxpayer eligibility and system features helped keep costs modest. States varied in whether they used contractors to develop and operate the I-file system. For the states we profiled, it is unclear whether benefits were greater than costs, in part, because of the low number of taxpayers who converted from paper to electronic filing. IRS’s potential to realize net cost savings from an I-file system depends on the costs of developing the system and the number of taxpayers converted from paper. IRS’s costs to provide a new I-file service could be higher than states’ for several reasons: (1) the federal tax system is more complex, (2) unlike some states that already had transactional Web sites, IRS would need to develop the capability to receive tax returns on its Web site, and (3) developing an I-file system could further stretch IRS’s capability to manage systems development, an area we have designated high risk since 1995. The key to IRS achieving a net cost savings depends on the number of individuals converted from paper to electronic filing and the savings per return estimated to be $2.36 by IRS. It is uncertain how many of the 58 million taxpayers who filed on paper would convert. The over 13 million taxpayers who self-prepare their returns on a computer but print them out and mail them to IRS are an attractive target for I-file because they already have access to a computer and may be more willing to try I-file. However, IRS’s Free File program, designed to attract similar taxpayers, had low use in 2006, with only 4 million users (about 3 percent of total taxpayers and 4 percent of eligible taxpayers). TETR and split refund volume have been less than IRS projected. Almost 69 percent of individuals who filed individual income tax returns by the end of March have requested TETR, although all who paid the excise tax were eligible for the refund. IRS projected that 10 to 30 million individuals who did not have a tax filing obligation could claim TETR. Approximately 410,000 individuals from this group have asked for a TETR refund (2.8 percent of the 14.5 million IRS expected by this time). As of March 24, fewer than 61,000 individual taxpayers chose to split their refunds into different accounts out of the 44.8 million taxpayers who had their refunds directly deposited. This volume compares to the 3.8 million IRS projected for the filing season. IRS delayed processing a small number of returns claiming tax extender provisions until February 3 to complete changes to its tax processing systems. The number of calls to IRS’s toll-free telephone lines has been less than last year and is significantly less than in 2002 for both automated and live assistance (see table 1). Similar to last year, IRS assistors answered about 40 percent of the total calls, while the rest of the calls were answered by an automated menu of recordings. Taxpayers’ ability to access IRS’s telephone assistors is somewhat less than last year, but IRS is meeting its goals. As shown in table 2, the percentage of taxpayers who attempted to reach an assistor and actually got through and received services—referred to as the level of service— was one percentage point less than the same time period last year. This level of performance is slightly greater than IRS’s fiscal year goal of 82 percent which is the same as last year’s goal. Average speed of answer, which is the length of time taxpayers wait to get their calls answered, is just over 4 minutes, almost 40 percent longer than last year, but is better than IRS’s annual goal of 4.3 minutes. Taxpayer disconnects, which is the rate at which taxpayers waiting to speak with an assistor abandoned their calls to IRS, increased to 12.3 percent to about 1.4 million calls compared to the same time period last year. While IRS disconnects are a smaller percentage of all calls it receives, those disconnects were down from approximately 491,000 at this time last year to 148,000 (a 70 percent decline). Using a statistical sampling process, IRS estimates that the accuracy of telephone assistors’ responses to tax law and account questions to be comparable to the same time period last year. IRS officials noted that there was unprecedented hiring for fiscal year 2007, and while every employee working tax law applications completes a requisite certification process, new employees will be less productive than seasoned employees. IRS has implemented several initiatives, such as targeted monitoring of staff and mini-training sessions, to assist the new hires. IRS officials reported that tax system changes have had minimal impact on telephone operations so far this filing season. TETR-related calls are a small fraction of what IRS projected. Between January 1 and March 10, 2007, IRS expected 7.5 million TETR-related calls, but received about 370,000. This represented 1.8 percent of total calls received by IRS. IRS hired 650 full-time equivalents in fiscal year 2007, with the expectation that those hires would be used to cover anticipated attrition in 2008. Their first assignment was answering TETR telephone calls. They were also trained to handle other accounts calls and paper inventory should the demand for TETR assistance not materialize. IRS anticipated little impact on telephone service from the split refund option and tax provision extenders. For split refunds, IRS anticipated it would receive about 7,000 calls compared to the 70 million total calls it receives each year. IRS did not have projections for tax provision extenders. Use of IRS’s Web site has increased so far this filing season compared to prior years except for downloads of forms and publications and tax law questions. From January 1 through February 28, IRS’s Web site was visited more often and the number of searches increased. The number of downloaded forms and publications has decreased 14 percent over the same period compared to last year. According to IRS officials, it is too early in the filing season to determine why downloads have decreased. In terms of new features, IRS added a state deduction calculator this filing season, which IRS wants to use as a new standard for developing other on line calculators. Web site assistance is important because it is available to taxpayers 24 hours a day and it is less costly to provide than telephone and walk-in assistance. Table 3 IRS Web Site Use, 2006 and 2007 (data are in thousands) In addition to the Free File program, IRS’s Web site offers several important features, such as Where’s My Refund, which allows taxpayers to check on the status of their refunds. This year, the feature allows taxpayers to check on the status of split refunds, and tells the taxpayer if one or more of the deposits were returned from the bank because of an incorrect routing or account number. However, for certain requests, the feature is not useful. For example, IRS stopped some refunds related to TETR requests, but Where’s My Refund informed taxpayers that their refunds had been issued. Further, if taxpayers make a mistake calculating the amount of their refund the feature would indicate that IRS corrected the refund amount, but will not show the new amount. IRS is considering providing more information about taxpayer accounts on its Web site is part of IRS’s strategy to improve taxpayer services at reduce costs. There is further evidence that IRS’s Web site is performing well as these examples show. According to the American Customer Satisfaction Index, IRS’s Web site is scoring above other government agencies, nonprofits, and private sector firms for customer satisfaction (74 for IRS versus 72 for all government agencies surveyed and 71 for all Web sites surveyed). An independent weekly study by Keynote, a company that evaluates Web sites, reported that IRS’s Web site has repeatedly ranked in the top 6 out of 40 government agency Web sites evaluated in terms of average download time. Last year, IRS consistently ranked second for the same time period. Average download time remained about the same for IRS compared to last year, indicating that IRS is not performing worse but that other government agencies are performing better. On the basis of our own searches, we found IRS’s Web site to be readily accessible, easy to navigate, and easy to search. As of March 17, 2007, approximately 2 million taxpayers used IRS’s 401 walk-in sites, which is comparable to the same period last year. Figure 2 shows the trend in walk-in site use for the entire filing season including a slight projected decline in 2007. At walk-in sites, staff provide taxpayers with information about their tax accounts, answer a limited scope of tax law questions about, for example, to income and filing status, and provide limited tax return preparation assistance. As of March 10, 6,700 taxpayers have requested TETR on Form 1040EZ-T at walk-in sites, which is 5.3 percent of the 126,000 individuals IRS expected. IRS officials attribute this year’s projected decline in walk-in use to taxpayers’ increased use of tax preparation software and IRS.gov. This decline has allowed IRS to devote 4 percent fewer full-time equivalents compared to last year for walk-in assistance (down from 187 to 179 full- time equivalents). Volunteer sites, often run by community-based organizations and staffed by volunteers who are trained and certified by IRS, do not offer the range of services provided at walk-in sites. Instead, volunteer sites focus on preparing tax returns primarily for low-income and elderly taxpayers and operate chiefly during the filing season. The number of taxpayers getting return preparation assistance at over 11,000 volunteer sites has increased to approximately 1.3 million, up 8 percent from last year and continuing a trend since 2001. Although no projections have been made for TETR claims, over 33,000 taxpayers have claimed this credit at these locations. We have reported that the shift of taxpayers from walk-in to volunteer sites is important because it has allowed IRS to transfer time-consuming services, such as return preparation, from IRS to other less costly alternatives that can be more convenient for taxpayers. While IRS is collecting better data on the quality of service at walk-in sites, concerns about quality of the data and service remain. According to IRS, it is measuring the accuracy of tax law and accounts assistance. IRS has reported a goal for tax law accuracy, and plans to use data collected for 2007 to set an annual goal for accounts accuracy. While IRS provides return assistance for 125,000 taxpayers, it lacks information on the accuracy of that assistance. For volunteer sites, as of March 2, for a small non-statistical sample, IRS reported a 69 percent accuracy rate for return preparation, compared to its goal of 55 percent. Independent from IRS, but using similar methods, TIGTA showed a 60 percent accuracy rate. TETR is the only one of the three tax changes that created new compliance concerns for IRS (filers could request greater TETR amounts than they are entitled to). The split refund option does not create compliance concerns for IRS since it relates to the accounts into which taxpayers want their refunds deposited rather than to complying with tax provisions. Since the provisions extending the tax laws already existed, IRS anticipates that any compliance concerns for 2006 returns will be the same as for previous years’. IRS developed a plan before the filing season began, to audit suspected TETR overclaims before issuing refunds. IRS’s plan for TETR was consistent with good management practices identified in previous GAO reports. IRS’s plan included appointing an executive, developing an implementation plan for TETR that included standard amounts that individuals could request, developing a compliance plan to select TETR requests for audit, and monitoring and evaluating compliance by using real-time data to adjust TETR compliance efforts. For example, each week, IRS reviews the requests for TETR and selects some for audit and revises the criteria for audit selection as necessary. As of March 24, about 211,000 individuals had requested the actual amount of telephone excise tax paid for a total of $98.8 million. IRS selected about 5 percent of these requests for audit, involving about $29 million. IRS has closed four of the individual audits with the taxpayer agreeing to accept the standard amount, and has not completed the remaining individual audits or any of the business audits. About 189,000 businesses had requested TETR for a total of about $74.7 million. IRS selected about 560 for audit, involving about $5.6 million. IRS reassigned about 77 full-time equivalent staff from discretionary audits and earned income tax credit audits to conduct TETR audits. Additionally, Criminal Investigation has spent 13 full-time equivalent staff on TETR activities in 2007. Many taxpayers choose to pay others to prepare their tax returns rather than prepare their own returns. Sixty-two percent of all the individual tax returns filed for the 2006 filing season used a paid preparer. In most states, anyone can be a paid preparer regardless of education, training, or licensure. However, there are different types of preparers. Paid preparers who hold professional certificates include CPAs and attorneys. Other preparers vary in their backgrounds. Some have extensive training and experience and others do not. In 2003 we reported to this Committee that while many taxpayers who used paid preparers believed they benefited from doing so, some were poorly served. Last year we reported to this Committee on errors made by commercial chain preparers, including the results of undercover visits to 19 locations. In our visits to 19 outlets of several commercial chain preparers, we found that paid preparers made mistakes in every one of our visits, with tax consequences that were sometimes significant. The errors resulted in unwarranted extra refunds of up to almost $2,000 in five instances, while in two cases they cost the taxpayer over $1,500. Some of the most serious problems involved preparers not reporting business income in 10 of 19 cases; not asking about where a child lived or ignoring our answer to the question and, therefore, claiming an ineligible child for the earned income tax credit in 5 out of the 10 applicable cases; failing to take the most advantageous postsecondary education tax benefit in 3 out of the 9 applicable cases; and failing to itemize deductions at all or failing to claim all available deductions in 7 out of the 9 applicable cases. At the time, IRS officials responded that, had our undercover investigators been real taxpayers filing tax returns, many of the preparers would have been subject to penalties for such things as negligence and willful or reckless disregard of tax rules and some may have risen to the level of criminal prosecution for willful preparation of a false or fraudulent return. The taxpayers in these cases would also have been potentially exposed to IRS enforcement action. The limited data did not permit observations about the quality of the work of paid tax preparers in general. Undoubtedly, many paid preparers do their best to provide their clients with tax returns that are both fully compliant with the tax law and cause them to neither overpay nor underpay their federal income taxes. IRS and the paid preparer community have taken some actions as a result of our work. After we provided the results of our 19 visits to IRS, IRS determined that 4 of these cases warranted a Program Action Case. In a Program Action Case, IRS selects 30 tax returns from a preparer and audits them to look for a pattern of compliance problems. IRS officials told us that these audits would begin in April 2007. Other cases were referred to the office responsible for monitoring earned income tax credit compliance, and we have been told that 10 preparers that we visited will receive visits to check for compliance with the due diligence requirements of that program. IRS also referred the cases to the office that monitors electronic filing compliance. We also presented our findings at all six of its nationwide tax forums last year, large educational conferences for the paid preparer community. In addition, we have been told that some tax preparation chains and preparer organizations have incorporated the results of our work into their educational materials. Finally, we recommended that IRS conduct research to determine the extent to which paid preparers live up to their responsibilities to file accurate and complete tax returns based on information they obtain from their customers. IRS officials have described plans to develop data to use to research paid preparer compliance issues, including whether tax preparers who are noncompliant themselves are more likely to prepare client returns that are noncompliant. To date, this research has not been completed. While this may be useful research, we do not believe such research would determine the extent to which paid preparers live up to their responsibilities. Recent suits filed by the Justice Department highlight the obligations of paid preparers. The Justice Department filed suits to stop fraudulent return preparation at more than 125 outlets in four states of one preparation chain for allegedly taking part in preparation scams that led to fraudulent returns. Because they help the majority of taxpayers prepare their returns, paid preparers are a critical quality control checkpoint for the tax system. Due diligence by paid preparers has potential to prevent non-compliance and reduce IRS’s cost and intrusiveness. BSM is critical to supporting IRS’s taxpayer service and enforcement goals and reducing the tax gap. For example, BSM includes projects to allow taxpayers to file and retrieve information electronically and to provide technology solutions to help reduce the backlog of collections cases. Despite progress made in implementing BSM projects and improving modernization management controls and capabilities, significant challenges and serious risks remain, and further program improvements are needed, which IRS is working to address. Over the past year, IRS has made further progress in implementing BSM projects and in meeting cost and schedule commitments, but two key projects experienced significant cost overruns during 2006—CADE and Modernized e-File. During 2006 and the beginning of 2007, IRS deployed additional releases of the following modernized systems that have delivered benefits to taxpayers and the agency: CADE, Modernized e-File, and Filing and Payment Compliance (a tax collection case analysis support system). Each of the five associated project segments that were delivered during 2006 were completed on time or within the targeted 10 percent schedule variance threshold, and two of them were also completed within the targeted 10 percent variance threshold for cost. However, one segment of the Modernized e-File project as well as a segment of the CADE project experienced cost increases of 36 percent and 15 percent, respectively. According to IRS, the cost overrun for Modernized e-File was due in part to upgrading infrastructure to support the electronic filing mandate for large corporations and tax-exempt organizations, which was not in the original projections or scope. IRS has also made significant progress in implementing our prior recommendations and improving its modernization management controls and capabilities, including efforts to institutionalize configuration management procedures and develop an updated modernization vision and strategy and associated 5-year plan to guide information technology investment decisions during fiscal years 2007 through 2011. However, critical controls and capabilities related to requirements development and management and post implementation reviews of deployed BSM projects have not yet been fully implemented. In addition, more work remains to be done by the agency to fully address our prior recommendation of developing a long-term vision and strategy for completing the BSM program, including establishing time frames for consolidating and retiring legacy systems. IRS recognizes this and intends to conduct further analyses and update its vision and strategy to address the full scope of tax administration functions and provide additional details and refinements on the agency’s plans for legacy system dispositions. Future BSM project releases continue to face significant risks and issues, which IRS is taking steps to address. IRS has reported that significant challenges and risks confront its future planned system deliveries. For example, delays in deploying the latest release of CADE to support the current filing season have resulted in continued contention for key resources and will likely impact the design and development of the next two important releases, which are planned to be deployed later this year. The potential for schedule delays, coupled with the reported resource constraints and the expanding complexity of the CADE project, increase the risk of scope problems and the deferral of planned functionality to later releases. Maintaining alignment between the planned releases of CADE and the new Accounts Management Services project is also a key area of concern because of the functional interdependencies. The agency recognizes the potential impact of these project risks and issues on its ability to deliver planned functionality within cost and schedule estimates and, to its credit, has developed mitigation strategies to address them. We will, however, continue to monitor the various risks IRS identifies and the agency’s strategies to address them and will report any concerns. IRS has also made further progress in addressing high-priority BSM program improvement initiatives during the past year, including efforts related to institutionalizing the Modernization Vision and Strategy approach and integrating it with IRS’s capital planning and investment control process, hiring and training 25 entry-level programmers to support development of CADE, developing an electronic filing strategy through 2010, establishing requirements development/management processes and guidance (in response to our prior recommendation), and defining governance structures and processes across all projects. IRS’s high- priority improvement initiatives continue to be an effective means of assessing, prioritizing, and incrementally addressing BSM issues and challenges. However, more work remains for the agency to fully address these issues and challenges. In addition, we recently reported that IRS could improve its reporting of progress in meeting BSM project scope (i.e., functionality) expectations by including a quantitative measure in future expenditure plans. This would help to provide Congress with more complete information on the agency’s performance in implementing BSM project releases. IRS recognizes the value of having such a measure and, in response to our recommendation, is in the process of developing it. Continued compliance research is essential to IRS’s ability to effectively focus its service and compliance efforts, and we have long been a supporter of such research. Well designed compliance research gives IRS and Congress an important measure of taxpayer compliance and it allows IRS to better target enforcement resources towards noncompliant taxpayers. Taxpayers benefit as well, because properly targeted audits mean fewer audits of compliant taxpayers and more confidence by all taxpayers that others are paying their fair share. IRS develops its tax gap estimates by measuring the rate of taxpayer compliance—the degree to which taxpayers complied with their tax obligations fully and on time. That rate is then used, along with other data and assumptions, to estimate the dollar amount of taxes not timely and accurately paid. For instance, IRS most recently estimated a gross tax gap of $345 billion for tax year 2001 and that underreporting of income represented over 80 percent of the gap. IRS developed these estimates using compliance data collected through its 2001 NRP study, which took several years to plan and execute. In that study, IRS reviewed the compliance of a random sample of about 46,000 individual taxpayers and used those results to estimate compliance for the population of all individual taxpayers and identify sources of noncompliance. IRS also used the 2001 NRP results to update its computer models for selecting likely noncompliant tax returns and used that model to select cases beginning with returns filed in 2006. IRS’s fiscal year 2008 budget request states that this improved targeting of audits has increased dollar-per-case yield and reduced “no change” audits of compliant taxpayers. IRS now has a second NRP study underway, this one looking at 5,000 S corporation tax returns filed in 2003 and 2004. IRS’s fiscal year 2008 budget request includes a proposal for a rolling NRP sample of individual taxpayers and a dedicated cadre of examiners to conduct these research audits. Using a rolling sample, IRS plans to replicate the 2001 NRP study by conducting audits of a smaller sample size. At the end of 5 years, IRS would have a comparable set of results to the 2001 study and continue to update the study annually by sampling the same number of taxpayers, dropping off the oldest year in the sample, and adding the new years’ results every year. We support this approach. In previous GAO products, we have observed that doing compliance studies once every few years does not give IRS or others information about what is happening in the intervening years, and that a rolling sample should reduce costs by eliminating the need to plan entirely new studies every few years or more and train examiners to carry them out. Compliance research in this way will also give Congress, IRS, and other stakeholders more frequent and more current information about IRS’s progress towards its long term compliance goals. Mr. Chairman, this concludes my prepared statement. We would be happy to respond to questions you or other members of the Committee may have at this time. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, at 202-512-9910 or whitej@gao.gov or David A. Powner, Director, Information Technology Management Issues at 202-512-9296 or powenrd@gao.gov. Contacts for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Joanna Stamatiades, Assistant Director; Amy Dingler; Timothy D. Hopkins; Robyn Howard; Matthew Kalmuk; David L. Lewis; Frederick Lyles; Jennifer McDonald; Signora May; Veronica Mayhand; Paul B. Middleton; Sabine R. Paul; Cheryl Peterson; Neil Pinney; Shellee Soliday; and Tina L. Younger. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. 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Summary: The Internal Revenue Service's (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers. This year's filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR) which can be requested by all individuals and entities that paid the excise tax. GAO was asked to describe IRS's service to taxpayers so far this filing season (including the impact of this year's tax systems changes). GAO was also asked to provide updates of previous assessments of the performance of paid tax preparers, IRS's efforts to modernize its information systems, and what IRS is doing to better measure taxpayer compliance. GAO compared IRS's filing season performance to prior years' and goals and based analyses of paid preparers, information systems, and compliance research efforts on recent reports. IRS's interim filing season performance is improved in some areas. The number of individual income tax returns processed to date is comparable to last year, and the number filed electronically is almost 6 percent greater. Taxpayers' ability to reach an IRS telephone assistor was somewhat less than last year, but the accuracy of answers to taxpayers' questions was about the same. Use of IRS's Web site increased, important because it is available 24 hours a day and is less costly than some other types of assistance. However, there have been challenges. Taxpayers' use of the Free File program, which provides free tax preparation and electronic filing through IRS's Web site--is 5.2 percent below last year at this time. Also, the Customer Account Data Engine (CADE), a modern tax return processing system, became operational 2 months behind schedule. IRS still expects to post 17 -19 million taxpayer accounts to CADE, which is about two and a half times more than last year. Tax systems changes have not had a significant effect on filing season performance. For example, IRS has received a fraction of the TETR-related telephone calls it expected to date. Because paid preparers prepared over 62 percent of all individual income tax returns last year, they are a critical quality control for tax administration by helping to prevent noncompliance. Last year, GAO reported to this Committee about errors made by paid preparers. Some of the most serious errors involved not reporting business income and failing to itemize deductions. GAO's limited work last year did not permit observations about the quality of the work of paid tax preparers in general and undoubtedly, many preparers do their best to prepare tax returns that are compliant with tax laws. In response to GAO's report, IRS has scheduled compliance reviews of some preparers. In addition, recent Justice Department suits to stop fraudulent return preparation at more than 125 outlets of one preparation chain for allegedly taking part in tax preparation scams highlight the importance and obligations of paid preparers. Despite progress made in implementing Business Systems Modernization projects, including CADE, and improving modernization management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. Also, IRS has more to do to fully address GAO's prior recommendations such as developing a long-term strategy that would include timeframes for retiring legacy computer systems. GAO has long supported IRS's research to better understand taxpayers' compliance. IRS's fiscal year 2008 budget request includes a proposal for annual research instead of larger but intermittent efforts. GAO considers this to be a good approach because it will allow compliance data to be continually refreshed and should reduce costs by eliminating the need to plan new studies every few years.