To meet our three objectives, we took the following steps. Reviewed and analyzed IRS reports, testimonies, budget submissions, and other documents and data, including performance and workload data, and compared these to IRS’s goals and past performance to identify trends and anomalies in performance. We also tested for statistically significant differences between annual performance rates based on IRS sample data. Observed operations at the Joint Operations Center (which manages IRS’s telephone services) and IRS’s walk-in sites in Atlanta, Ga. and Baltimore, Md. and a volunteer site in Washington, D.C. We selected these particular offices for a variety of reasons, including the location of key IRS managers; Analyzed staffing data for paper and electronic filing, telephone assistance, and walk-in assistance. Reviewed information from other organizations who compile information pertinent to our objective, such as Keynote Systems, which evaluates Internet performance. Reviewed IRS reports and analyzed IRS data on RALs and RACs to identify trends and opportunities to reduce taxpayers’ reliance on them. Reviewed IRS data and analyzed methods IRS currently employs to identify taxpayer compliance with eligibility requirement for higher education tax benefits. Reviewed MEA-related statutes to determine IRS’s existing and possible new authorities. Interviewed IRS officials about current operations, trends, and significant factors and initiatives that affected performance; efforts to reduce reliance on RALs and RACs; and monitoring and oversight of compliance issues, including higher education credit claims. 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 Treasury Inspector General for Tax Administration (TIGTA) reports and interviewed a TIGTA official about IRS’s performance and initiatives. Reviewed prior GAO reports and followed up on our recommendations made in filing season and related reports. This report discusses numerous filing season performance measures and data covering 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 attribute the information to IRS officials in our report. We reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to our standards of data reliability. Data limitations are discussed where appropriate. Finally, we conducted our work primarily at IRS headquarters including at the Small Business/Self-Employed Division in Washington, D.C., and the Wage and Investment Division headquarters in Atlanta, Ga. as well as the other sites mentioned earlier. We conducted this performance audit from January 2009 through December 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We received technical and written comments on a draft of this report, which we addressed. A letter from the IRS Deputy Commissioner for Services and Enforcement providing those comments is reprinted in appendix I. In that letter, the Deputy Commissioner explicitly agreed with five of our recommendations and described the steps IRS is taking with respect to our two other recommendations. Most taxpayers file their individual income tax returns electronically, although millions still mail paper returns. Compared to paper, electronic filing allows taxpayers to receive refunds faster, is less prone to transcription and other errors, and provides IRS with significant cost savings. Last year we reported that IRS estimated it used 39 percent fewer staff years for processing tax returns in 2007 than in 1999 for a savings of $85 million. The Free File program provides taxpayers below an income ceiling with access to a consortium of tax preparation companies that offer free on-line tax preparation and filing services for qualifying taxpayers. CADE, part of IRS’s high-risk Business System Modernization program (BSM), is intended to eventually replace IRS’s antiquated Master File legacy processing system and facilitate faster refund processing and provide IRS with more up-to-date account information. Primarily through its telephone, Web site, and, to a much lesser extent, through its face-to-face assistance, IRS also provides tax law and account assistance, limited return preparation, tax forms and publications, and outreach and education. IRS staff provides assistance at 401 walk-in sites where taxpayers can receive basic tax law assistance, receive assistance with their accounts, and have returns prepared by IRS if their annual income is $42,000 or less. IRS also has volunteer partners that staff over 12,000 sites, which help serve traditionally underserved taxpayer segments, including elderly, low-income, and disabled taxpayers, and taxpayers with limited English proficiency. IRS developed the Taxpayer Assistance Blueprint (TAB), a 5-year plan designed to assist the agency in providing, evaluating, and improving taxpayer services at lower cost. TAB also provided estimates of the cost- per-service contact for different types of taxpayer services and conducted preliminary research about the effect of taxpayer service on compliance. IRS delivered an update of TAB to Congress in October 2009. Millions of taxpayers who do not want to wait for their tax refunds from IRS choose to obtain RALs, which are offered by paid preparers or banks to taxpayers in connection with federal and/or state tax refunds. RALs are short-term, high interest rate bank loans. We found that the annual percentage rate on RALs can be over 500 percent, RALs offer taxpayers the benefit of receiving cash quickly based on an expected refund. Combined with tax preparation fees, RALs may considerably reduce a taxpayer’s refund. However, RALs remain popular, especially among low-income taxpayers. RAL providers might also offer RACs, which are not loans, but instead are a refund delivery option where IRS direct deposits a refund into a temporary account set up by a financial institution, which withdraws the tax return preparation fee, and then makes the remaining funds available to the taxpayer. RALs and RACs allow taxpayers to pay return preparation and fees out of their refunds. IRS uses its many tools to identify and correct noncompliance, whether intentional or unintentional. Over the years, Congress granted IRS statutory authority to cover specific areas so that the agency could correct tax return errors during processing, including calculation errors and entries that are inconsistent or exceed statutory limits, without having to issue the taxpayer a statutory notice of deficiency (see app. II for details). Math error checks are automated and low-cost relative to audits. Prompt compliance checks, such as math error checks, increase the likelihood of IRS collecting all or part of the amount owed. However, IRS must be granted MEA from Congress by statute for specific purposes, and as noted above, we recently suggested areas where IRS could benefit from new authorities. IRS gets most of the information returns during the filing season. These returns are provided by third parties, such as employers, banks, or educational institutions, file returns with IRS and taxpayers that provide information on a variety of taxpayer transactions. IRS tries to match information from the information returns filed by third parties against taxpayers’ income tax returns to see if taxpayers have filed returns and reported their income and expenses. This approach tends to lead to high levels of taxpayer compliance. As of October 2, 2009, IRS processed 139 million individual income tax returns. As shown in table 1, 94 million taxpayers (68 percent) electronically filed their returns compared to 88 million (62 percent) last year, excluding the 9 million stimulus-only returns. Electronic filing provides IRS with significant cost savings—IRS estimates the cost savings of electronic filing to be $2.71 per return over the costs in 2008. It helps taxpayers to receive their refunds faster and aids IRS in achieving the electronic filing goal of having 80 percent of all federal tax and information returns filed electronically by 2012. IRS issued approximately 109 million refunds, up 4 million from last year, for $298 billion. Approximately 66 percent of all refunds were directly deposited, 9 percent more than last year. This increase is important, because direct deposit is faster, more convenient for taxpayers, and less expensive for IRS than mailing paper checks. IRS attributes the increase in electronic filing, in part, to a 19 percent increase in people filing from home computers, which may be related to the elimination of separate fees for electronic filing. According to IRS, the elimination of fees by some paid preparers also contributed to the decline in the Free File program—as of September 20, 2009, the number of taxpayers who filed through Free File decreased to 3 million, down 37 percent from last year. IRS also attributed part of the decrease to the migration of taxpayers to other free offers in the marketplace. The Free File program offered a new option this year, fillable forms, that allow taxpayers to download forms from IRS and fill them in on a home computer without using tax preparation software. About 270,000 taxpayers used this option. Finally, IRS met or exceeded its goals for six out of eight of the processing measures (see app. II for details). For example, IRS exceeded its goals for refund timeliness, and deposit timeliness and accuracy. The one measure where performance was significantly below IRS’s goal and last year’s level was the correspondence error rate, which is the percentage of incorrect notices and letters issued to taxpayers. According to IRS officials, this resulted from a high number of erroneous notices sent to taxpayers during the filing season related to the recovery rebate credit. In our interim report, we noted that millions of tax returns had these types of errors, which resulted in a delay in refund timeliness from 1 day to a week. IRS took actions to address the errors, including developing an automated tool to correct the errors more quickly.