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.