Our assessment of IRS’s 2004 filing season performance was based on analyses of IRS data and information obtained from sources outside IRS, interviews with IRS officials and private sector tax practitioners, observations of IRS operations, and, for the comparison to previous years, on our past filing season reports. reviewed and analyzed IRS reports, testimonies, budget submissions, other documents and data, including workload data and data from IRS’s current suite of balanced performance measures, which we used to assess performance this year; interviewed IRS officials about current operations, performance relative to 2004 goals and prior filing seasons, and significant factors and initiatives that affected performance; interviewed representatives of large private and non-profit organizations that prepare tax returns and trade organizations that represent both individual practitioners and tax preparation companies; reviewed related TIGTA reports and interviewed TIGTA officials; followed up on GAO recommendations made in prior filing season and tested for statistical differences between yearly changes for various IRS analyzed information posted to IRS’s Internet Web site based on GAO’s knowledge of the type of information taxpayers look for, and assessed the ease of finding information, as well as the accuracy and currency of data on the site; reviewed information from companies that evaluated Internet performance and assessed various aspects of IRS's Web site; and reviewed staffing data for paper and electronic processing, telephone assistance, and walk-in assistance. This report discusses filing season performance measures and data covering the quality, accessibility, and timeliness of IRS’s services. We have previously reported that some of the performance measures IRS uses to assess aspects of its filing season performance had attributes of successful measures, including objectivity and reliability, although in some cases, the measures could be further refined. Since that report, IRS has made refinements in some measures. We also reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to GAO standards of data reliability. As a result, we determined that the IRS data we are reporting are sufficiently reliable for assessing IRS’s filing season performance. Data limitations are discussed where appropriate. We conducted our work at IRS headquarters in Washington, D.C.; the Small Business/Self-Employed Division headquarters in New Carrollton, Maryland; the Wage and Investment Division headquarters, the Joint Operations Center (which manages telephone service), and a telephone call site in Atlanta, Georgia; and walk-in and volunteer locations in Georgia, Maryland, and Virginia. We selected these offices for a variety of reasons, including the location of key IRS managers, such as those responsible for telephone and walk-in and volunteer services. We performed our work from January through October 2004 in accordance with generally accepted government auditing standards. IRS’s filing season is an enormous and critical undertaking that includes two key activities—returns processing and taxpayer assistance—and which consumes thousands of staff years annually. Processing of paper returns is labor intensive and error-prone. IRS employees manually transcribe paper tax return information into IRS’s computer systems, which can introduce errors. Electronic filing allows taxpayers to receive refunds faster, and processing is less labor-intensive and error prone than for paper returns. IRS does not have to transcribe electronic tax return information and built-in checks eliminate many errors that IRS has to deal with when processing paper tax returns, such as computational mistakes and incorrect social security numbers. The rate for this type of error on electronic tax returns was almost 4 percent compared to almost 25 percent on paper tax returns, as of July 9, 2004. To help taxpayers comply with their tax obligations, IRS provides various services at its call sites, walk-in sites, and on its Web site. Figure 1 shows how toll-free telephone calls from taxpayers typically are routed through IRS’s telephone system and answered by customer service representatives (CSRs) or by automated services. At IRS’s approximately 400 walk-in sites taxpayers ask tax law questions, get account information, receive assistance with their accounts, and have returns prepared (if annual gross income is $35,000 or less). In addition, low-income and elderly taxpayers get tax returns prepared at over 13,500 volunteer sites run by community-based coalitions that partner with IRS. IRS awards grants, trains and certifies volunteers, and provides reference materials, computer software and, in some cases, computers to these volunteer organizations. IRS’s Web site is important because it allows taxpayers to instantly download hundreds of tax forms and publications, access current information on tax issues and electronic filing, and ask IRS tax law and procedural questions. Since passage of the IRS Restructuring and Reform Act of 1998 (RRA 98), IRS has been focused on improving filing season services. In 2001, IRS established a suite of balanced performance measures. The system emphasizes accountability for achieving specific results and reflects IRS’s priorities, including providing quality service to each taxpayer in every interaction. As part of its strategic planning and budgetary processes, IRS establishes performance goals each fiscal year and uses them to hold managers and frontline staff more accountable for improving filing season performance. IRS processed individual income tax returns and issued refunds smoothly in 2004. IRS nearly met or exceeded many of its 2004 performance goals, with performance generally improving since 2001. However, despite continued growth this year and despite various initiatives to encourage electronic filing, IRS is not on track to achieve its long-term goal of having 80 percent of all individual tax returns filed electronically by 2007. As of September 17, 2004, IRS had processed about 128 million individual tax returns, including for 67 million returns filed on paper, with no significant disruptions and issued nearly 100 million refunds within specified tolerances. According to IRS data, IRS nearly met or exceeded seven out of its eight processing performance goals in 2004. Similarly, 2004 performance nearly met or exceeded 2003 performance for six of the seven comparable measures. Appendix 1 provides details. Furthermore, as Appendix 1 and the following examples show, IRS has generally improved its processing operations over a longer period. The percent of notices with errors has declined since 2002 (for notices sent to taxpayers about possible simple mistakes on their returns). In 2002, 18.7 percent of the notices were issued with errors compared to 9.4 percent as of July 31, 2004 (the most current data available). The refund error rate, the percentage of refunds with IRS-caused errors (e.g., incorrect name or Social Security number), has decreased from 9.8 percent in 2001 to 5.3 percent in 2003, to 4.9 percent as of July 31, 2004 (the most current data available). Tax practitioners, who last year prepared approximately 62 percent of all individual income tax returns, agreed that the processing of returns in the 2004 filing season has gone smoothly. Representatives from the National Association of Enrolled Agents, American Institute of Certified Public Accountants, and other tax related organizations had positive comments on IRS’s 2004 filing season and processing. Similarly, TIGTA officials told us that IRS generally processed returns smoothly in 2004. IRS officials attributed this year’s performance in part to their planning for tax law changes, such as the advance child tax credit and the increase in electronic filing. The number of individual income tax returns that IRS received electronically continued to grow, and IRS exceeded its 2004 goals for the number and percentage of tax returns to be filed electronically. From January 16 through September 17, 2004, it had received an estimated 61.1 million individual tax returns electronically or 47 percent of all returns filed to date. Also, the growth rate of 15.8 percent is greater than IRS’s projected growth rate of 13 percent for this year. Figure 2 shows that growth since 1996. According to IRS officials, the primary reason for the greater than expected growth rate is that five states mandated electronic filing of state tax returns prepared by qualified tax practitioners for 2004. According to these same officials, these mandates led to significantly more electronic filing of federal tax returns in these states because tax practitioners converted their entire practices to electronic filing. For example, for California and Michigan, the largest of the five states, the number of tax returns filed electronically increased from 4.7 million and 1.9 million in 2003 to 7.1 million and 2.6 million respectively as of May 2004. The current rate of growth of electronic filing, however, will not allow IRS to achieve its long-term electronic filing goal of 80 percent of all returns by 2007, provided by RRA 98. Assuming a continuation of the current growth rates of 15.8 percent for individual returns filed electronically and .23 percent for the total number of individual tax returns filed, IRS would receive 73 percent of individual tax returns electronically by 2007. However, neither IRS nor the Electronic Tax Administration Advisory Committee (ETAAC) expects IRS to maintain this year’s growth rate. In fact, IRS is predicting declining growth rates of about 11.5 percent, 9.9 percent, and 8.1 percent in 2005, 2006 and 2007, respectively. In its June 30, 2003, report to Congress, ETAAC concurred with IRS’s prediction of lower annual growth rates. IRS officials stated that achieving the 80 percent goal would require taxpayers and tax practitioners who prepared 39 million individual income tax returns on a computer but filed them on paper would instead have to file them electronically, or legislation would have to be proposed and passed that mandates electronic filing by tax practitioners. Electronic filing is important because, according to IRS, it costs less to process electronic tax returns than paper tax returns. IRS estimates it saves $2.15 on every individual tax return that is processed electronically. However, we cannot independently verify this estimate and its basis is unclear, because as we have reported, IRS does not have a cost accounting system to support preparation of such cost estimates. Electronic filing has allowed IRS to close paper processing centers, devote less staff to the processing of tax returns, and control processing costs by shifting resources from labor-intensive paper return processing to other areas, such as compliance.