To assess IRS’s 2007 filing season performance in the key filing season activities compared to goals and past performance, and identify and assess potential improvements or efficiencies in filing season operations, we reviewed and analyzed IRS reports, testimonies, budget submissions, and other documents and data, including workload data, data related to IRS’s performance measures and goals, and data on taxpayer usage and other statistics such as the number of paid preparers; observed operations at IRS’s Atlanta, Ga. and Andover, Ma. paper processing centers, the Atlanta and Andover call sites, the Joint Operations Center (which manages IRS’s telephone services) in Atlanta, and several of IRS’s walk-in locations in Atlanta and Baltimore, Md. and selected these offices for a variety of reasons, including the location of key IRS managers, such as those responsible for telephone and walk-in site services; tested for statistically significant differences between annual performance measures based on IRS sample data; analyzed staffing data for paper and electronic filing, telephone assistance, reviewed information from organizations, such as Keynote Systems, that evaluate Internet performance; interviewed IRS officials about current operations, performance relative to 2007 performance goals and prior filing season performance, trends, significant factors and initiatives that affected or were intended to improve performance, monitoring and oversight of paid tax preparers, and research conducted or planned to examine links between taxpayer service and compliance; interviewed representatives of some of the larger private and nonprofit organizations that prepare tax returns, including H&R Block and trade organizations that represent both individual paid preparers, tax preparation companies, and professional associations, including the American Institute of Certified Public Accountants; reviewed TIGTA reports and interviewed TIGTA officials about IRS’s performance and initiatives; and reviewed prior GAO reports and followed up on our recommendations made in prior filing season and related reports. This report discusses numerous filing season performance measures and data that cover the quality, accessibility, and timeliness of IRS’s services that, based on our prior work, we consider sufficiently objective and reliable for purposes of this report. To the extent possible, we corroborated information from interviews with documentation and data and where not possible, we report the information as attributable to IRS officials. We reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to GAO standards of data reliability. Data limitations are discussed where appropriate. Finally, we conducted our work primarily at IRS headquarters in Washington, D.C., the Wage and Investment Division headquarters in Atlanta, Ga., as well as the other sites mentioned earlier. IRS’s filing season is an enormous and critical undertaking that consists of two primary activities, processing individual income tax returns and providing taxpayer assistance. It consumes more than $3 billion annually. Taxpayers can file their returns by mailing paper returns to one of IRS’s five paper processing centers or submitting the returns electronically. Electronic filing has provided IRS with significant cost savings. Electronic filing is faster, which allows taxpayers to receive refunds faster, and is less error prone—IRS does not have to transcribe electronic tax return information and built-in checks eliminate many errors that IRS has to address when processing paper tax returns, such as correcting computational mistakes and SSNs. In addition, taxpayers below an income ceiling can access the Free File program offered through IRS’s Web site by a consortium of 19 tax preparation companies that offer free online tax preparation and filing services. IRS’s Business Systems Modernization (BSM) program, which began eight years ago, is a high-risk, highly complex effort critical to supporting IRS’s taxpayer service goals, such as increasing electronic filing and providing more accurate and timely responses to taxpayer inquiries. To date, IRS has deployed releases of modernized systems that have delivered substantial benefits to taxpayers and the agency, including e-Services (a new Web portal and services for paid preparers) and parts of CADE, which is the new taxpayer information database that facilitates faster refund processing and provides IRS with more up-to-date account information. CADE is intended to eventually replace IRS’s antiquated Individual Master File legacy processing system, which is the agency’s repository of taxpayer account information, and therefore, is the BSM program’s cornerstone and highest priority project. IRS also provides a variety of taxpayer services, including tax law assistance, account resolution, limited return preparation, tax forms and publications distribution, outreach, and education, mainly through its telephone operations, Web site, and face-to-face assistance sites. Taxpayers can call IRS’s toll-free assistance telephone lines with questions about tax law or their refunds. Depending on how taxpayers respond to menu choices, questions are answered by an automated message or calls are routed to telephone assistors located at 24 call sites around the country. Calls are routed to the next available assistor assigned to answer specific questions, e.g., tax law, account, or refund questions. IRS provides many services through its Web site, including “Where’s My Refund,” which enables taxpayers to use the Web site to determine whether the agency received their tax returns and processed their refunds. Taxpayers can also download forms, instructions, and publications, research their own tax law issues through Frequently Asked Questions or Tax Topics, and receive help with specific tax law questions and procedural questions via e-mail. IRS’s volunteer program has become an increasingly important part of IRS’s face-to-face assistance. It expanded to 66 national partners that include financial, social service, corporate, educational, and government organizations and helps IRS serve traditionally underserved taxpayer segments, including the elderly, low-income, disabled taxpayers, taxpayers with limited-English proficiency, Native Americans, and rural taxpayers. Additionally, IRS has 401 walk-in sites where taxpayers can ask basic tax law questions, get account information, receive assistance with their accounts, and have returns prepared if their annual income is $39,000 or less. In April 2007, IRS released its final TAB report, a 5-year plan designed to assist the agency in providing, evaluating, and improving taxpayer services at lower costs. As part of its research into the costs of taxpayer services, IRS developed estimates of the cost-per-service contact for providing different types of taxpayer services and conducted preliminary research about the effect of taxpayer service on compliance. We have reported that IRS lacks quantitative estimates of the impact of taxpayer service and its enforcement efforts on voluntary compliance; TAB should help IRS obtain better estimates. We also have long supported IRS’s research efforts to measure the tax gap, which is the difference between what is paid voluntarily and on time and what is owed, and help reduce it. As we previously reported, despite the 2007 filing season being characterized as high-risk, in large part because of the Telephone Excise Tax Refund (TETR), the impact of TETR on taxpayer services has been much less than IRS anticipated. In addition to IRS, paid preparers are a critical part of the nation’s tax administration system because of the wide variety of services they offer and their unique relationship with taxpayers. Paid preparers may combine several taxpayer services, including help understanding tax obligations, answering tax law questions, and providing tax forms and publications, return preparation, and electronic filing. In previous reports and testimony, we have reported that paid preparers have made serious errors, although undoubtedly many do their best to provide their clients with quality service. Electronic filing and CADE both have the potential to further reduce IRS’s costs and improve processing speed and accuracy. Many tax returns are still filed on paper, which increases processing cost, and limits information readily available for IRS’s enforcement programs. As of September 14, 2007, IRS processed approximately 135 million individual income tax returns. Of those returns, approximately 79 million (58 percent) were filed electronically and the remaining 56 million were filed on paper. The number of returns filed electronically increased 9 percent over last year, which is greater than last year’s increase and more than IRS projected. One factor contributing to the growth in electronic filing is mandates. Thirteen states now mandate electronic filing of state returns, which has increased electronic filing of both state and federal tax returns. Despite the overall increase in electronic filing, taxpayer’s use of the Free File program continued to decline. For example, as of June 21, IRS processed about 3.8 million returns filed through the Free File program, 2 percent less than last year. IRS officials attributed this decline in part to companies offering free electronic online filing separate from the Free File program. Growth in electronic filing generates savings for IRS by reducing staff needed for labor-intensive paper processing. In 2006, IRS used almost 1,700 (36 percent) fewer staff for processing tax returns than in 1999. IRS estimates that this saved the agency $78 million in salary, benefits, and overtime in 2006. In addition, IRS has achieved ancillary space cost savings from the closing of submission processing centers. IRS estimated the cost savings as a result of closing the Brookhaven and Memphis paper processing centers to be $24.9 million in 2007. IRS closed its Philadelphia paper processing center at the end of September 2007, and plans to close its Andover paper processing center in 2009. IRS issued over 103 million refunds, totaling almost $233 billion, as of September 14, 2007. Nearly 60 percent of the refunds were directly deposited, almost 7 percent over the same period last year, which is important because direct deposit is faster, more convenient for taxpayers, and less expensive for IRS than mailing paper checks. IRS met or exceeded seven out of nine processing performance goals and continues a trend of improvement (see app. I for details). For example, IRS met or exceeded its goals for the percentage of errors included in letters, notices, and refunds. For eight of its nine measures, IRS met or exceeded its previous year’s performance. IRS did not meet one goal and paid more interest on delayed refunds than expected, because of problems with a computer system that processes some taxpayer identification numbers and the inexperience of new staff. IRS did not meet its efficiency goal because it received fewer easy to process TETR returns than expected. Groups and organizations we spoke with, including the National Association of Enrolled Agents, the American Institute of Certified Public Accountants, and large tax preparation and tax preparation software companies, corroborated what the processing performance data showed, saying the filing season went smoothly. Similarly, TIGTA recently reported that IRS had a successful filing season. IRS was late in delivering its latest version of CADE, its new tax return database, intended to replace the legacy Individual Master File. CADE Release 2.2 started processing returns in early March but did not become fully operational until late May, nearly 5 months behind schedule, because of problems identified during testing. IRS originally intended CADE to post 33 million taxpayer returns during 2007, more than four times the 7.4 million posted by CADE last year. With the delay IRS revised its estimate down to approximately 17 to 19 million returns, then down to 11 to 12 million returns. As of early August, CADE had posted 11 million returns, or about one-third of what IRS expected, and disbursed 11 million refunds totaling over $11 billion. A major benefit of CADE is that it is faster than the legacy Individual Master File system. According to IRS officials, direct deposit refunds are issued by CADE 1 to 5 business days faster than the current legacy system, and paper check refunds are issued 4 to 8 business days faster. Because of the delays in CADE millions of taxpayer refunds were not issued as fast as IRS planned. Even with the latest version of CADE deployed, last year IRS estimated that over $500 million more would be required to fully implement the individual income tax processing part of the system. Moreover, the CADE setback adversely affected IRS’s ability to deliver the functionality planned for the next release, such as processing the earned income tax credit schedule, and has caused IRS to reconsider the functionality of other future CADE releases. IRS expects future releases of CADE to be linked with its Account Management System (AMS) releases, requiring increased attention to issues of synchronization and coordination between the two systems. According to IRS officials, CADE and AMS working together will enable IRS to process tax returns and address many taxpayer issues, such as address changes, in a near real-time manner, which benefits both IRS and taxpayers. Further complicating matters, IRS has additional plans for CADE, such as processing tax returns claiming the earned income tax credit, during the 2008 filing season. IRS is aware of these challenges and is working on a revised Release Content Master Plan, which it plans to complete by November 2007, detailing the capabilities and interdependencies associated with future releases of CADE and AMS and the plans for replacing the legacy Individual Master File system. Paper returns cost IRS tens of millions of dollars to process. In all of 2006, IRS received about 63 million paper returns. Of these, 60 percent (38 million) were prepared on a computer, but then printed and mailed to IRS. IRS codes such returns with a “V.” IRS estimates that a paper return costs $2.36 more to process than an electronically filed return. This difference implies that, if IRS could convert all v-coders to electronic filing, IRS could save roughly $90 million annually. Furthermore, if all v-coders could be converted to electronic filing, the number of paper returns remaining and needing to be transcribed would be greatly reduced. Paper returns also limit the effectiveness of IRS’s enforcement programs. To control costs, IRS does not transcribe all the lines on paper tax returns into its computer databases, such as taxpayers’ telephone numbers, limiting the amount of information available electronically for enforcement purposes. As we previously reported, even small changes in the amount of information IRS transcribes can consume substantial resources that might offset some potential savings from electronic filing. Further, to avoid disadvantaging taxpayers who file electronically, IRS has a policy of posting the same information from electronic and paper returns to its databases. Consequently, if a line is not transcribed from paper returns, it is not posted from electronic returns either. Only information posted to computer databases is readily available for use in IRS’s automated compliance checking programs. These programs include matching tax return entries with information returns from third parties, such as Form W-2s from employers or Form 1099s from financial institutions, and selecting suspicious returns for audit. According to IRS officials, transcribing and posting more comprehensive information from individual income tax returns could facilitate the audit process, expedite contacts for faster resolution, reduce handling costs, allow for improved case selection, and potentially better define specific tax gap issues. Although we have not independently verified IRS’s methodology, for one of its main enforcement programs—the Automated Underreporter Program—IRS officials estimate that having all tax return information available electronically would result in a $175 million increase in tax revenue annually, while at the same time, reduce its “no-change” rate, making it less likely that IRS would select taxpayers for further contact where no additional tax was assessed, thus lowering taxpayer burden. State experiences provided some corroboration of IRS’s views, as officials we spoke with reported that greater electronic access to return information allowed them to verify information on state returns and improved their enforcement programs while reducing the number of compliant taxpayers who were contacted. At least two options exist to increase electronic filing—mandates and bar coding. Last year we suggested that the Congress mandate electronic filing by paid preparers meeting certain criteria, such as a threshold number of returns. Mandating electronic filing would not convert all v-coders, because it would not apply to taxpayers who prepare their own returns on a computer. Still, most v-coders use a paid preparer (68 percent in 2006). Another option to increase electronic filing is bar coding of all printed returns prepared using commercial software. IRS has done preliminary research showing that 100 percent of the information on a return could be condensed into a bar code, which could be read by hand-held scanners. Consequently, bar coding produces some of the efficiencies of electronic filing by replacing the labor-intensive transcription process and eliminating transcription errors. However, bar coding would still require some processing of paper such as receiving and opening paper mail. Several states already require bar coding on their printed returns and there is an industry standard among developers and vendors for creating bar codes. Moreover, many of the largest software providers already support bar coding. IRS’s Wage and Investment Operating Division staff developed a proposal for bar coding. However, Wage and Investment officials rejected that proposal in June 2007, in part because it involved upgrading a legacy system. Wage and Investment officials told us they are developing a new funding proposal for no earlier than 2010, which would likely include bar coding. IRS, however, lacks several pieces of information that would help it make a decision about whether the benefits exceed the costs of bar coding and transcribing the residual paper returns. Actions required: IRS does not know the actions needed to require commercial software vendors to include bar codes on printed returns. IRS officials told us that they have not conferred with the software vendors about the actions that would be necessary. Nor have they conferred with the states about the actions they took to mandate bar coding. Without knowing the necessary actions, IRS cannot estimate the costs and time frames for a bar code program. Benefits: While IRS has estimates of the savings from converting from paper to electronic filing, it does not have estimates of the savings from converting paper to bar coded returns. Although it estimated the increased revenue possible from the Automated Underreporter Program, IRS does not have a complete estimate of the revenue gains across all its enforcement programs that would be realized if all tax return information were transcribed and posted. Breakeven: IRS does not know how much electronic filing would have to increase, through either mandated electronic filing or bar coding, before transcribing the residual paper returns would pass a benefit/cost test. Gathering the above information would have some costs to IRS. However, the cost savings to IRS and increased revenue could be in the range of hundreds of millions of dollars. Additionally, taxpayer compliance burden might be reduced. Although they are an important part of the tax administration system, IRS has limited information about paid preparers. However, IRS has research and other initiatives under way intended to gain more information. As shown in figure 2, paid preparers have filed an increasing majority of all individual income tax returns over the last decade. During the 2006 filing season, paid preparers prepared nearly 78 million (61 percent) of the 127 million individual income tax returns. Of the preparer returns, nearly 70 percent were filed electronically. As we said in past reports, paid preparers are a critical quality-control checkpoint for the tax system and, as with IRS, the quality of the service they provide is important. However, we also said that some paid preparers made serious errors. For example, in 2006 we found that all 19 of the commercial preparers we visited made errors completing returns. Some of the most serious errors involved not reporting business income and failing to itemize deductions. Our limited work did not permit generalizing about the quality of all paid preparers’ work and undoubtedly, many preparers do their best to prepare returns that are compliant with tax laws. We also previously reported that, while many taxpayers believe they benefited from using a paid preparer, millions may have been poorly served. IRS has some information on paid preparers. For example, IRS requires paid preparers to identify themselves on all income tax returns they prepare by entering their SSN or PTIN. However, IRS does little to monitor or track basic information about individual paid preparers. For example, IRS does not collect information on the type of preparers, such as whether the preparer is an enrolled agent or part of a commercial chain, or the number or types of returns filed by preparers. Having such information could allow IRS to better identify filing errors and target its outreach to specific preparers or preparer groups. IRS currently has efforts under way intended to begin remedying the lack of information about paid preparers. One important step was the Return Preparer Summit, which took place in late September 2007. According to IRS, the Summit included officials from multiple IRS offices who discussed how to better coordinate and communicate between offices with paid preparer responsibilities. IRS officials expect to present their findings and potential recommendations in March 2008 when IRS updates its recent report on voluntary compliance and the tax gap. IRS is exploring the development of a database that will serve as a centralized repository of paid preparer information. IRS envisions that such a database could facilitate more robust compliance efforts and allow taxpayers to access information on the status of an enrolled agent. Additionally, the database could potentially be expanded to operate as a tracking system if proposed legislation mandating universal enrollment and testing of preparers was to be passed by the Congress. In the meantime, IRS is working to better utilize and potentially improve existing databases to share preparer information across its offices with paid preparer responsibilities. Further, according to IRS, the agency plans to conduct research on paid preparers as outlined in TAB. Paid preparer initiatives include studying how taxpayers select a paid preparer, evaluating the scope and nature of paid preparer errors, assessing IRS’s outreach strategy to paid preparers, and observing paid preparers’ business models in order to better understand how to provide effective services to reduce errors. Paid preparers can support IRS’s efforts to improve compliance. They assist the majority of individual income tax filers, and the assistance they offer can potentially help taxpayers avoid errors. Having additional information on paid preparers could help the agency identify and possibly prevent systematic errors and noncompliance, and could be important in guiding IRS’s outreach and education strategies for paid preparers. TAB and other initiatives IRS has planned are steps that should give the Congress and IRS a better basis for making decisions about the future oversight of paid preparers. Access and accuracy are key measures of IRS’s telephone performance, because IRS received 69 million calls during the filing season. At the same time, reducing excess capacity at call sites is important, because of the magnitude of IRS’s telephone operations. Taxpayers’ access to IRS’s telephone assistors was comparable to last year and IRS’s goal, as measured by level of service which is the percentage of taxpayers who wanted to talk with an assistor and actually got through and received service (see table 1). For two other access measures, average speed of answer—the length of time taxpayers wait to get their calls answered—and taxpayer disconnects—the rate at which taxpayers waiting to speak with an assistor abandoned their calls to IRS—IRS’s performance weakened somewhat compared to the same period last year, but the comparison is complicated by a policy change. As of June 30, average speed of answer increased about 15.4 percent and was slightly higher than IRS’s goal, and the taxpayer disconnect rate also increased. According to IRS officials, both increases were due, in part, to a decision by IRS to disconnect fewer taxpayers waiting to speak with an assistor. This decision resulted in taxpayers having the option of either waiting to speak with an assistor or hanging up rather than IRS deciding for them by disconnecting the call, resulting in increased taxpayer choice along with increases to both the average speed of answer and the taxpayer disconnect rate. Finally, IRS officials noted that Customer Voice Portal, a new call queuing process that routes calls directly to available assistors instead of to call sites, resulted in a more equalized wait-time for taxpayers calling to speak with an assistor this year. IRS estimates that the accuracy of telephone assistors’ responses to tax law and account questions was comparable to the same time period last year and met IRS’s goals. Moreover, as noted in table 2, since 2005, accuracy has been about 90 percent or more and was significantly better than in 2001. IRS received about 69 million calls on its toll-free telephone lines through June 2007, which was less than expected, but slightly more than in 2006. IRS’s automated service handled roughly the same number of calls as those handled by IRS assistors, although the number of automated calls received was fewer than last year (22.1 million), while the calls answered by assistors was equivalent to last year. Of the calls received by IRS, 28.8 million calls were from taxpayers trying to obtain information on the status of their tax refunds, despite increasing use of IRS’s Web site feature, “Where’s My Refund.” Another 22.2 million were about account questions, and 13.1 million were about tax law questions. Because millions of taxpayers continue to depend on IRS’s telephone assistance, it remains a critical part of taxpayer services. Moreover, IRS and our prior reports have noted that assisting taxpayers with tax questions reduces burdensome notices and inadvertent noncompliance. As part of TAB and other initiatives, IRS plans to conduct more research into the effect of telephone assistance on compliance. IRS’s telephone operations consume most of IRS’s taxpayer service budget. According to TAB, assisted telephone services accounted for 65 percent and automated assistance accounted for 2 percent of the nearly $1 billion total costs to the agency for providing taxpayer assistance in 2005. At this time IRS does not have plans to automate more calls, since the agency has already shifted easier calls to automation and Web assistance, leaving the more difficult and time-consuming account and tax law calls that require the attention of assistors. In addition to answering telephones, IRS devotes resources to processing paper inventory, such as amended returns and taxpayer correspondence at some of its call sites. Because of limited TETR call demand, IRS closed more paper inventory than anticipated, meaning that taxpayer issues were resolved more quickly. As seen in figure 4, call volume has not declined and accordingly, resources devoted to answering telephones have not declined noticeably since 2001, while resources devoted to paper inventory have declined almost 14 percent since 2001. IRS has initiatives to expand and improve on telephone services including Centralized Customer Contact Forecasting and Scheduling to modernize the current system of workload forecasting, scheduling, and tracking workload and training requirements. Working groups looking into ways of improving taxpayer services, such as developing ways to synchronize telephone message information with Web site services to better link different service channels. IRS’s goal is to revise the messages heard by taxpayers calling to speak with assistors after business hours, during holidays, or when telephone lines are too crowded to accommodate them, so that taxpayers are told not only when to try back, but are also referred to IRS’s Web site for further information. Last year we recommended that IRS timely develop, validate, and implement a plan to consolidate call sites because, at the filing season’s peak, IRS determined that it had 850 unused assistor workstations spread across its 24 call sites. According to IRS officials, the number of unused workstations has not changed. IRS completed a workload analysis designed to evaluate changes in telephone staff resources and call demand and used business criteria, such as the types of calls answered at call sites and facility and employee costs, to identify call sites for potential closure. IRS plans to conduct an extensive cost-analysis review of different options for reducing excess capacity prior to potentially closing any sites, has secured funding for the analysis, and is in the process of obtaining a contractor to assist with the review. Web site performance remains high, which is important because IRS’s Web site is used by millions of taxpayers, is available to taxpayers 24 hours a day, is much less costly than other types of assistance, and will remain important as more taxpayers use self-assistance. Use of IRS’s Web site increased this filing season compared to prior years’ except for downloads of files such as tax forms and publications, as shown in table 3 below. According to IRS officials, one reason for the decrease in downloads is the conversion of IRS publications and instructions from file format to another format, which IRS does not count as part of downloads. Additionally, the increased use of electronic filing and tax preparation software reduces the need for taxpayers to download tax forms and publications. However, because of the decline, IRS will continue to monitor the number of downloads and identify possible issues associated with downloading files. Evidence that IRS’s Web site is performing well includes the following: According to the American Customer Satisfaction Index, for the 2007 filing season, January 1 through April 17, 2007, IRS’s Web site scored above other government agencies, nonprofits, and private sector firms for customer satisfaction (74 for IRS versus 72 for all government agencies versus 71 for all business surveyed), and better than during the 2006 filing season. An independent weekly study by Keynote Systems, Inc., a company that evaluates Web sites, reported that, as of July 16, 2007, IRS’s Web site repeatedly ranked in the top 6 out of 40 government agency Web sites evaluated in terms of average download time. According to IRS, the number of e-mails and telephone calls to the Web site HelpDesk decreased compared to the 2006 filing season, and average page views per visit decreased, indicating that visitors to the Web site are finding information more quickly. Additionally, this year IRS implemented a new sales tax deduction calculator, which IRS wants to use as a standard for developing other online calculators, and updates to the Free File, Alternative Minimum Tax, and Earned Income Tax Credit applications. Also, this year the “Where’s My Refund” feature allowed taxpayers to check on the status of split refunds, and told the taxpayer if one or more deposits were returned from the bank because of an incorrect routing or account number. IRS has initiatives to expand and improve on its Web site services. Tax Law Support Tools will provide Web site self-assistance tools to taxpayers and other external stakeholders, allowing users to conduct keyword and natural language queries. The first release of Internet Customer Account Services will allow individual taxpayers to view their account information online and is expected to be deployed in July 2008. A Spanish version of “Where’s My Refund” will enable Spanish speaking taxpayers to check refund status and receive account information. Volunteer sites play an increasingly important role in the tax system and are part of IRS’s and the Department of Treasury’s integrated multiyear strategy to reduce the tax gap by better identifying and recruiting partners that are more skilled than IRS at reaching underserved taxpayers, including the elderly, disabled, low-income, Native American, and rural taxpayers. Volunteer sites prepared 2.4 million returns, an increase of 17 percent over last year and higher than projected through April 21, 2007. As illustrated in figure 5, this is consistent with previous trends for volunteer and walk-in sites. Return preparation at volunteer sites has more than doubled since 2001, while return preparation at IRS’s walk-in sites has declined by almost 74 percent during the same period. Increased return preparation assistance at volunteer sites, rather than at walk-in sites, allows IRS to devote more resources to services such as account assistance, which can only be provided by IRS staff. Further, TAB data show return preparation assistance provided at walk-in sites is four times more expensive per return than at volunteer sites. Moreover, TAB data show that walk-in sites are used by a small percentage of taxpayers, yet account for over 20 percent or, $201 million, of the almost $1 billion spent on taxpayer assistance in 2005. Despite an increase in the number of returns prepared at volunteer sites, the quality of volunteer-prepared returns remains largely unknown and what is known is not statistically reliable. IRS’s current initiative to monitor the quality of returns at volunteer sites is in its second year of implementation and includes mystery shopping, site and return reviews. However, according to IRS officials, volunteer sites had advanced notice of site and return reviews, but not mystery shopping. Consequently, IRS acknowledged that the advance notice of these reviews was likely to bias the results. While IRS plans to continue to perform site and return reviews in 2008, officials said that following a sampling plan that would yield results that could be generalized to the universe of volunteer sites would be too costly. Instead, IRS plans to conduct unannounced return reviews, continue site reviews, and increase the number of mystery shopping visits from the 39 done in 2007 to 100. According to IRS officials, mystery shopping yields the best evaluative result of the three reviews IRS uses to assess the quality of volunteer-prepared returns. We agree that having unannounced visits and increasing the number of mystery shopping visits is likely to yield a better evaluative result than the potentially biased methods previously used for monitoring return preparation. Furthermore, we and TIGTA acknowledge the difficulties in collecting statistically valid information about return preparation assistance at volunteer sites. In addition to quality, IRS uses some other measures to monitor the performance of its volunteer program, such as the number of returns prepared, percentage prepared electronically, and the satisfaction of its partners, such as financial, social service, corporate, and government organizations. While useful, these measures do not reflect the extent to which the volunteer program improves taxpayer compliance and participation in programs such as the earned income tax credit. IRS has increased its reliance on the volunteer program and plans to commit more resources. However, as we testified earlier this year, IRS’s budget submission did not include basic performance information about the program. More specifically, IRS does not know the extent to which the program influences the taxpaying behavior of its target populations. Regarding IRS’s walk-in sites, IRS recently started implementing contact recording intended to better measure the accuracy of tax law and account assistance. As shown in figure 6, contact recording automatically captures the audio portion of a taxpayer contact and synchronizes it with an IRS walk-in site assistor’s computer screen activity. With the exception of a microphone that sits atop the desk of the walk-in site assistor, contact recording is similar to the system IRS uses to monitor and assess the quality of telephone interaction between taxpayers and telephone assistors. IRS has deployed contact recording at 127 of its 401 walk-in sites, which represents 46 percent of walk-in site contacts. As of May 26, 2007, IRS data show accuracy rates of 85 percent for accounts assistance and 80 percent for tax law assistance, and IRS officials expect accuracy rates to improve as IRS deploys contact recording at more sites. Although IRS currently has plans to fully deploy the contact recording systems to all walk-in sites by 2009, contact recording is not included in its plans to assess the quality of return preparation assistance. IRS intends on relying on managerial observation of employee/taxpayer interactions while providing return assistance. We have previously reported that employees’ performance could be influenced by the knowledge that they are being observed by managers, biasing the results. Additionally, managers were not consistently coding employee performance. Consequently, without an unbiased method, IRS lacks reliable information to assess performance, establish obtainable goals, and measure progress toward goals. According to IRS officials, contact recording used to measure the accuracy of tax law and account assistance could be extended to include return preparation assistance. For example, the equipment is already at many of the sites—it is used to measure the accuracy of tax law and account assistance, but turned off for return assistance. IRS officials said that IRS had not yet determined the feasibility of using contact recording for return assistance. IRS officials were concerned that contact recording, as it is currently configured, might miss some aspects of return preparation assistance, such as verifying taxpayers’ documents. Further, IRS officials noted that because it takes longer to prepare a return than answer a tax law or account question, managerial review of return preparation takes longer than for tax law or account assistance. However, officials also noted that managers would be likely to spend the same amount of time using the manager observation method as with contact recording but manager observation would not yield reliable results. Without fully determining the feasibility of using contact recording for return assistance, IRS will not know if the concerns could be addressed and the existing equipment could be more fully utilized. TAB is a data-driven strategy that includes the results of extensive research designed to assist IRS in better understanding taxpayers’ service needs. For example, TAB research included several surveys that provided IRS with information about the services that taxpayers use or would use. TAB also provides plans to improve taxpayer services and a multiyear portfolio of research designed to provide information on the value of IRS services to taxpayers and partners and the effect of taxpayer service on compliance. According to IRS officials, with TAB, they now have more information about taxpayers than ever before. IRS developed estimates of the cost-per-service contact for providing different types of taxpayer services, although there were qualifications to those estimates. According to TAB, these estimates will provide a baseline methodology for computing and comparing the costs of services in the future. Having reliable cost information, together with a better understanding of taxpayers’ preferences, needs, and expectations, will assist IRS in determining whether it can provide taxpayers with the same services and benefits at lower cost through alternative methods. As table 4 shows, these costs vary widely depending on the type of service provided. TAB has potential value. In the past, we have stressed the importance of reconsidering the level and types of services IRS provides to taxpayers, such as whether to maintain the same number of walk-in sites. While we support IRS’s efforts to develop a data-driven strategy, the value of TAB will depend on several factors, such as Quantifying the linkage between taxpayer service and voluntary compliance. As noted above, TAB outlines a research portfolio that includes additional research on the impact of taxpayer service on voluntary compliance, which is consistent with the Department of Treasury tax gap report. According to TAB, a better understanding of the causes of noncompliance and the impact of specific taxpayer services on compliance would allow IRS to focus investments in taxpayer service to positively impact compliance. However, TAB recognizes that previous research has shown that quantifying this linkage is difficult. Coordinating and managing oversight responsibilities for TAB initiatives. IRS recently established a TAB Program Management Office responsible for facilitating, coordinating, and integrating TAB activities. The Program Management Office currently does not have authority to allocate funding for initiatives, and TAB officials said that it could be difficult to develop initiatives that require funding or coordination between different organizations without such authority. Obtaining funding. While some of the initiatives under TAB are funded mostly as extensions of existing efforts, most are not yet funded, and TAB does not contain any information related to how much, as a whole, it will cost. According to IRS, unfunded and future initiatives will have to compete with other IRS projects for funding within approved annual budgets. Including submission processing services. IRS officials acknowledge that submission processing is a significant component of service delivery and must be integrated into TAB. The timely processing of returns supports tax compliance and possibly reduces the need for taxpayer services. Over the last decade, IRS has improved its performance processing tax returns and providing taxpayer assistance. We see value in two IRS initiatives intended to further improve this performance. TAB, besides being a data-driven strategy for further improving service, may provide IRS with a better understanding of the effect of taxpayer service on compliance and thus of the return on IRS’s large investment in service. Similarly, obtaining more information about paid preparers is valuable because doing so should give the Congress and IRS a better basis for making decisions about the future oversight of paid preparers. In addition to these initiatives, we have identified other potential means for improving service. One opportunity is to increase electronically filed returns, either through mandates or bar coding, and transcribing the remaining lines on residual paper returns. However, IRS does not have the benefit/cost estimates that would be useful to make decisions about how to proceed. In particular, IRS does not know the actions needed to require software vendors to include bar codes on printed individual income tax returns and the cost of those actions; the benefits, in terms of processing costs and improved enforcement, of having all information available electronically; and how much electronic filing would have to increase for the benefits of transcribing all remaining paper returns to exceed the costs. Such information would allow IRS to compare the costs of additional transcription to the benefits of processing costs savings, additional enforcement revenues and reduced taxpayer burden. Additionally, despite increasing reliance on volunteer organizations to target underserved taxpayer groups, IRS lacks information on the effectiveness of its efforts. Finally, while IRS has been implementing contact recording at walk-in sites to monitor the accuracy of tax law and account assistance, it has not determined the feasibility of extending contact recording to its low-income return preparation assistance program. In both cases, the missing information impedes IRS’s ability to make data-based decisions about how to improve assistance to underserved taxpayers. We recommend that the Acting Commissioner of Internal Revenue direct the appropriate officials to determine actions needed to require software vendors to include bar codes on printed individual income tax returns and the cost of those actions; determine the benefits, in terms of processing costs and improved enforcement, of having all return information available electronically; determine how much electronic filing would have to increase, either through electronic filing mandates or bar coding, for the benefits of transcribing all remaining paper returns to exceed the costs; develop estimates of the effectiveness of IRS’s volunteer program at targeting underserved populations; and determine the feasibility of using contact recording as a method of monitoring and improving the quality of return preparation assistance at IRS’s walk-in sites. The Acting Commissioner of Internal Revenue provided written comments in a November 7, 2007 letter in which she agreed with all our recommendations and outlined IRS’s actions to address those recommendations. With respect to reducing processing costs and improving enforcement, IRS plans on specifically addressing these recommendations in a report to the Congress. With respect to assessing the effectiveness and quality of IRS’s face-to-face services, IRS reported it plans to develop methods of estimating how it can provide better face-to- face assistance. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to the Secretary of the Treasury; the Acting Commissioner of Internal Revenue; the Director, Office of Management and Budget; relevant congressional committees; and other interested parties. This report is available at no charge on GAO’s web site at http://www.gao.gov. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, on 202-512-9110 or whitej@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; Evan Gilman; Timothy D. Hopkins; Jennifer McDonald; Paul B. Middleton; Emily Norman; Karen O’Conor; Cheryl Peterson; Neil Pinney; and Lerone Reid. If you or your staffs have any questions, please contact me at (202) 512- 9110 or WhiteJ@gao.gov. As of June 30, the Internal Revenue Service met or exceeded seven out of nine processing performance goals and continues a general trend of improvement. As shown in table 6 below, IRS met or exceeded its goals for the percentage of errors included in letters, notices, refunds, and deposits; deposit timeliness (i.e., interest foregone by untimely deposits); and productivity. IRS met its goal for refund timeliness but did not meet its goals for refund interest paid and Individual Master File efficiency. IRS officials said that the lighter than expected TETR volume meant that IRS’s goal for Individual Master File efficiency could not be achieved because TETR returns were the easiest to process. Additionally, problems with a computer system that processes some taxpayer identification numbers and the inexperience of new staff adversely affected performance on refund interest paid. Table 5 also shows that IRS’s processing performance has significantly improved in some areas, such as the deposit and refund error rates, since 2001.

Summary: In 2007, the Internal Revenue Service (IRS) will spend over $3 billion to process returns and provide taxpayer service. Effective service can reduce taxpayers' burden of complying with tax laws and, many tax experts believe, may improve compliance. GAO was asked to assess IRS's performance relative to 2007 goals and prior years' performance including identifying actions that might generate efficiencies and increase compliance. GAO analyzed IRS performance data, reviewed IRS operations at various locations, and interviewed IRS and paid preparer representatives. IRS improved most filing season services during 2007, continuing a longer-term trend. Tax return processing exceeded last year's performance by most measures. Electronic filing grew at a faster rate than IRS anticipated and continued to generate savings. Access to IRS telephone assistors was comparable to last year, and the accuracy of responses to questions remained at about 90 percent. The performance of IRS's Web site improved in several measures, such as customer satisfaction. Continuing past trends, more taxpayers used volunteer sites, which are less costly than IRS's walk-in sites. Despite these improvements, IRS could reduce the number of paper tax returns processed and also transcribe all lines from the residual paper returns, making that data more available for enforcement. Two options for reducing paper processing are electronic filing mandates, previously suggested by GAO, and bar coding, which could be required for paper returns prepared on computers and reduces processing costs. Currently, because of the cost, IRS does not transcribe all lines from paper returns. Further, IRS policy is to post the same lines from electronic and paper returns to its enforcement databases. As a result, IRS does not use all tax return information in its automated compliance checking programs. However, IRS does not know the actions needed to require software vendors to include bar codes on printed tax returns; the benefits, in terms of processing savings and improved enforcement, of having all return data available electronically; or how much electronic filing would have to increase, either through mandates or bar coding, for the benefits of transcribing all residual paper returns to exceed the costs. Despite more reliance on its volunteer program, IRS has not evaluated its effectiveness at reaching underserved taxpayers. Further, IRS may be missing an opportunity to assess the quality of return preparation assistance at its walk-in sites through contact recording, a system IRS uses to record and assess the quality of other interactions between its employees and taxpayers.