Our objective was to assess IRS’ performance during the 1994 filing season. Specifically, we focused on IRS’ ability to (1) process income tax returns and refunds accurately and efficiently and (2) provide taxpayers access to forms, information, and electronic filing methods. To achieve our objective, we validated the results of 1 service center’s test of the accuracy and timeliness of refunds by reviewing 853 randomly selected refunds; analyzed filing season-related data from IRS’ Management Information System for Top Level Executives and IRS data on processing errors, including those involving the EIC; reviewed IRS reports on refund fraud; reviewed computer system availability reports and attended weekly operational meetings held by IRS’ National Office Command Center; assessed the availability of tax materials by visiting 10 walk-in sites; tested taxpayers’ access to ordering forms and publications from IRS’ 3 tax material distribution centers by placing phone calls to those centers; analyzed IRS’ toll-free telephone system accessibility data, telephone activity data for area distribution centers, and telephone accessibility reports for the TeleFile system; compiled trend data for various indicators of IRS’ filing season performance; and interviewed IRS National Office officials and IRS officials in the Atlanta; Cincinnati; Fresno, CA; and Kansas City, MO, Service Centers responsible for the various activities we assessed. We did our work from January through August 1994 in accordance with generally accepted government auditing standards. With the exception of the refund accuracy rate and refund timeliness measure, we did not test and verify statistical data provided by IRS. We discussed our findings and conclusions in an exit conference attended by cognizant IRS officials, including the National Director for Submission Processing, the Assistant Commissioner for Taxpayer Services, the Director for Taxpayer Service Design and Review, and the Chief of the Publishing Distribution Section. Their comments are presented and evaluated on page 15. Other changes resulting from their comments were made in the body of the report as appropriate. There were many positive aspects of the 1994 filing season. After an unexpected drop in individual income tax return filings in 1993, the number filed in 1994 went up, although not as much as IRS had originally anticipated; and more of those returns were filed through alternative methods like electronic filing. IRS’ computer systems generally performed well with intermittent problems causing only minor delays. IRS also exceeded its accuracy and timeliness goals for processing refunds and its accuracy goal for processing returns and took positive steps to improve its processing of tax receipts. However, there were some problems. The EIC continued to be a leading source of errors by taxpayers and tax practitioners in preparing returns, thus contributing to IRS’ error resolution workload; and the number of fraudulent refund claims identified by IRS continued to grow at a troubling pace. As of September 9, 1994, IRS had received 113.4 million individual income tax returns, compared to 112.7 million for the same period in 1993. In planning for the 1994 filing season, IRS had expected to receive 117.5 million individual returns—a projection that was based on historical growth rates. As shown in figure I.1 in appendix I, in the several years preceding 1993, the number of individual income tax returns filed increased consistently from year to year. However, there was an unexpected reduction in the number of returns filed in 1993. Because of the drop in the number of filers, IRS’ Research Division analyzed the shortfall in 1993 individual income tax returns. IRS determined that the major causes of this shortfall were (1) the IRS Reduce Unnecessary Filings program, (2) a drop in interest rates that reduced the income levels of certain taxpayers below filing requirement thresholds, and (3) the 1992 change in withholding rates that apparently left some individuals with an unanticipated balance due and who then did not file a return. On the basis of its analysis of the 1993 filing season, which was not completed until the spring of 1994—well into the 1994 filing season, IRS revised its projection model and dropped the expected 1994 filings to 114.5 million from the original 117.5 million. We did not review or test the assumptions IRS used to revise its projection model and, therefore, cannot comment on the reasonableness of the adjustment. As of September 9, however, the number of filings was still 1.1 million short of IRS’ revised expectations. Although the overall number of individual filers has not significantly increased, taxpayer use of the various alternative filing methods generally increased in 1994. IRS offers three types of filing alternatives to the traditional paper return: electronic, TeleFile, and 1040PC. Electronic and TeleFile use increased in 1994; 1040PC use declined slightly. In 1994, 13.5 million individual income tax returns were filed electronically—up from 12.3 million in 1993. As shown in figure I.2 in appendix I, this continues the consistent growth in electronic filing since it became available nationwide in 1990. Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free number on touch-tone telephones. In 1993, TeleFile was available to taxpayers in 1 state, and about 149,000 taxpayers used the system. IRS expanded the availability of TeleFile to 7 states in 1994, and the number of users grew to about 519,000. In 1995, IRS plans to expand TeleFile to all or parts of three more states and to double the number of telephone lines. IRS expects to further expand the system in 1996 and make it available nationwide in 1997. Under the 1040PC method, a filer uses personal computer software that produces tax returns in an answer-sheet format. The 1040PC shows the tax return line number and the data (dollar amount, name, etc.) on that line. Only lines on which the taxpayer has made an entry are included on the 1040PC. IRS received about 4.8 million 1040PC returns in 1993, but only about 4.2 million in 1994. IRS attributes the decline to a delay by a major return preparer in submitting its 1040PC software for IRS approval. The decline might also be attributed to problems with the 1040PC that were discussed during a September 1993 meeting of the Internal Revenue Commissioner’s Advisory Group. As reported in the September 3, 1993, issue of the Daily Tax Report, those problems involved taxpayers’ inability to interpret the 1040PC and use it as an aid in doing such things as (1) preparing state tax returns and (2) completing financial aid forms for children. IRS officials told us that steps have been taken to address these problems. In the future, 1040PC software packages will be required to provide the taxpayer with a legend explaining the lines on the 1040PC or a printed copy of the full return. IRS’ computer systems generally performed well during the 1994 filing season. However, some systems problems occurred that had operational impacts, such as downtime for IRS employees and short delays in refunds for taxpayers. Systems problems caused the computer systems at various locations to be unavailable to IRS personnel for generally short periods of time (less than 12 hours). According to IRS problem assessments, this limited downtime usually had a minimal impact on IRS’ overall operations. However, in 1 instance, a problem with the Automated Underreporter System at 1 service center caused IRS to lay off 270 temporary employees for about 1 week. IRS officials attributed this event to systemic problems in the software provided by the vendor. IRS had some intermittent systems problems that affected taxpayers. For example, one problem caused tax returns that were electronically filed at one service center on February 1, 1994, to not be processed on time. IRS estimated that the problem caused about a 1-week delay in processing those refunds. Two of IRS’ goals are to issue individual income tax refunds within an average of 40 days and with at least a 98-percent accuracy rate. IRS reports show that each of the 10 service centers met the timeliness goal, and the average issuance time for all 10 centers was 36 days. Also according to IRS data, 8 of the 10 centers met or exceeded the accuracy goal; the other 2 centers’ accuracy rates were within 1 percent of the goal. The average accuracy rate for all service centers was 98.6 percent. IRS measures refund accuracy by reviewing samples of nonelectronically filed returns with a refund due to the taxpayer. It compares the taxpayer’s name, address, and refund amount on the tax return with the same information on IRS’ master file, which is used to generate the refund check. By comparing this information, IRS can determine if an error was made and who made the error. IRS uses the same sample to measure refund timeliness. IRS computes the number of days from the return’s signature date to the date the taxpayer would have received the refund, allowing 2 days after issuance for the refund to reach the taxpayer. For the 1994 filing season, we examined the methodology IRS uses in measuring refund accuracy and timeliness. Using IRS criteria for testing accuracy and timeliness, we replicated its test at one service center using its four cluster samples. We selected and compared the results from a random sample of 853 refunds out of the service center’s 3,693 refunds used for its test. We agreed with 98.6 percent of the service center’s results. The 1.4-percent difference consisted of instances where service center personnel overlooked errors that our review caught. On the basis of these results, we concluded that the test conducted at one service center provides a valid measure of that service center’s accuracy and timeliness of refunds. In an effort to improve check processing and deposit tax receipts more timely, IRS (1) tested the use of lockboxes and (2) required each of the service centers to develop procedures for depositing revenues. Establishing lockboxes was not a new procedure for IRS. It has been using lockboxes for estimated tax payments since 1989.