Tax Administration: Assessment of IRS' 2000 Tax Filing Season (Letter
Report, 12/22/2000, GAO/GAO-01-158).

GAO reviewed the Internal Revenue Service's (IRS) performance during the
2000 tax filing season. Except for a few relatively minor glitches,
which were not unexpected given the enormity of the IRS processing task,
the processing systems worked well. On the other hand, although
taxpayers were better able to reach IRS over the telephone compared to
1999, IRS' performance was still well below the level achieved in 1998.
While GAO's review identified several positive aspects with respect to
IRS' monitoring of other forms of assistance for taxpayers to reach IRS,
it also identified several opportunities for improvement. In some
respects, such as with the volunteer assistance programs and the
assistance provided by IRS' walk-in sites and area distribution
centers,the opportunities centered around performance measures. In those
areas, unlike the situation with respect to IRS" telephone service, it
was not easy to assess IRS' performance because either IRS did not have
good measures or there were problems with the data behind the measures.
Other improvement opportunities centered around management
oversight--the kind of oversight that would enhance the level of service
provided by better ensuring that (1) training materials and computer
equipment were delivered to the volunteer assistance sites on time and
in working condition and (2) data being entered on the Web site by
various offices within IRS are current and consistent.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-158
     TITLE:  Tax Administration: Assessment of IRS' 2000 Tax Filing
	     Season
      DATE:  12/22/2000
   SUBJECT:  Tax administration
	     Performance measures
	     Customer service
	     Telephone
	     Tax returns
	     Taxpayers
IDENTIFIER:  IRS Tax Counseling for the Elderly Program
	     IRS Volunteer Income Tax Assistance Program
	     IRS Q-Matic System
	     Earned Income Credit
	     Earned Income Tax Credit

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GAO-01-158

TAX ADMINISTRATION

Assessment of IRS' 2000 Tax Filing Season Report to the Chairman,

Subcommittee on Oversight, Committee on Ways and Means, House of
Representatives

United States General Accounting Office

GAO

Page i GAO- 01- 158 IRS' 2000 Filing Season Letter 1

Results in Brief 2 Scope and Methodology 4 Processing Operations Went Well 4
Improvements Made in Assisting Taxpayers and Measuring

Performance, but More Can Be Done 10 IRS Expanded Its Efforts to Reduce EIC
Noncompliance; the

Overall Impact of Those Efforts Is Unclear 25 Conclusions 28 Recommendations
for Executive Action 29 Agency Comments and Our Evaluation 29

Appendix I Description of Processing and Customer Service Performance
Indicators 34

Appendix II Several Factors Contributed to the Increase in Electronic Filing
36

Appendix III Changes Made by IRS to Reduce Taxpayer Errors and Enhance
Processing 40

Appendix IV The EIC Preparer Outreach Program 43

Appendix V Comments From the Internal Revenue Service 45

Appendix VI GAO Contacts and Staff Acknowledgments 51

Tables

Table 1: IRS' Processing Performance Goals and Related Accomplishments for
the 1999 and 2000 Filing Seasons 6 Table 2: Number of Individual Income Tax
Returns Received, by

Filing Type 8 Contents

Page ii GAO- 01- 158 IRS' 2000 Filing Season

Table 3: IRS' Customer Service Performance Goals and Related Accomplishments
for the 1999 and 2000 Filing Seasons 11 Table 4: Accessibility of IRS'
Telephone Assistance 13 Table 5: IRS Forms and Publications Distribution
Channels 23 Table 6: EIC Recipients and Math Errors During 1999 and 2000 26

Abbreviations

BPOL Bank, Post Office, and Library ECN E- File Customer Number EIC Earned
Income Credit ERO electronic return originator IRS Internal Revenue Service
PIN Personal Identification Number SSN Social Security number TCE Tax
Counseling for the Elderly TIGTA Treasury Inspector General for Tax
Administration VITA Volunteer Income Tax Assistance

Page 1 GAO- 01- 158 IRS' 2000 Filing Season

December 22, 2000 The Honorable Amo Houghton Chairman, Subcommittee on
Oversight Committee on Ways and Means House of Representatives

Dear Mr. Chairman: In response to your request, this report assesses IRS'
performance during the 2000 tax filing season. For most taxpayers, their
only contacts with the Internal Revenue Service (IRS) are associated with
the filing of their individual income tax returns. 1 In addition to the
filing itself, those contacts generally involve (1) telephone calls to IRS
or visits to an IRS walk- in site 2 to obtain tax forms or publications or
to seek return preparation help and/ or (2) correspondence from IRS
regarding problems, such as computational errors or missing Social Security
numbers (SSN), that can affect processing of a return and/ or issuance of a
refund. Although every filing season contains challenges for IRS, the 2000
filing season was expected to be especially challenging because of the
potential for system- related problems associated with the Year 2000.

This report discusses (1) the processing of returns and refunds, including
efforts to increase electronic filing; (2) assistance to taxpayers provided
through various sources, including toll- free telephone lines, walk- in
sites, and the World Wide Web site on the Internet; and (3) efforts to
reduce improper Earned Income Credit (EIC) claims and payments. Included in
our discussion of the processing of returns and refunds is a summary of our
separate report on the performance of computer systems that IRS used to
process tax returns during the 2000 filing season. We issued that

1 Most taxpayers file their returns between January 1 and April 15, which is
the deadline for filing individual income tax returns. However, millions of
taxpayers get extensions from IRS that allow them to delay filing until as
late as October 15.

2 As used in this report, the term “walk- in sites” includes
both IRS' walk- in offices that are generally open all year and temporary
locations that IRS sets up during the filing season. It does not include
alternative taxpayer assistance sites, such as mobile vans or sites at
shopping malls and grocery stores.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 158 IRS' 2000 Filing Season

report in June 2000. 3 We also did a separate review of IRS' toll- free
telephone operations during the filing season, and we expect to issue a
report on our results early in 2001. We testified before this Subcommittee
on the interim results of all of our work in March 2000. 4

Regarding IRS' processing of returns and refunds, we noted the following:

? IRS indicators showed that IRS' performance in processing returns and
refunds during the 2000 filing season was generally as good or better than
in 1999. Most importantly,

? refunds were generally issued within the time frames set by IRS and

? electronic filing increased by about 21 percent compared to 1999, as more
taxpayers used the signature and payment alternatives offered by IRS.

? As we reported in June, despite the added risks associated with the Year
2000, the computer systems IRS used to process tax returns performed
slightly better during the 2000 filing season than during the 1999 filing
season.

? Changes that IRS made in an attempt to reduce taxpayer errors and enhance
the processing of returns and payments seemed to have had a positive effect.
For example, steps IRS took to simplify the child tax credit worksheet and
to revise the criteria for reporting capital gains contributed to fewer
errors by taxpayers and tax return preparers in those areas.

Regarding the various means through which IRS helps taxpayers during the
filing season, we noted the following:

? The ability of taxpayers to reach IRS over the telephone improved compared
to 1999 but was still well below the performance level achieved in 1998.

3 IRS' 2000 Tax Filing Season: IRS Measures Show Tax Processing Systems
Performed Slightly Better Than in 1999 (GAO/ GGD- 00- 146, June 16, 2000). 4
Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year 2001 Budget
Request (GAO/ T- GGD/ AIMD- 00- 133, Mar. 28, 2000). Results in Brief

Page 3 GAO- 01- 158 IRS' 2000 Filing Season

? IRS implemented measures for assessing the performance of its walk- in
sites but still lacked some critical information, such as reliable data on
customer satisfaction.

? IRS procedures provided for assessing the quality of returns prepared by
volunteer sites. However, IRS had no measures for assessing the timeliness
of service provided by the sites or taxpayer satisfaction with those
services. Also, (1) IRS district office representatives were required to
make monitoring visits to volunteer assistance sites but were not given
specific guidance as to what to review during those visits and (2) the late
delivery of computer equipment and training materials hampered the ability
of volunteer sites to effectively serve taxpayers.

? Data on IRS' Web site showed increased use and improved performance in
2000 compared to 1999, but some information on the site was obsolete or
inconsistent.

? IRS' performance measures did not adequately reflect the timeliness with
which IRS' area distribution centers responded to taxpayers' orders of forms
and publications.

Over the past several filing seasons, IRS implemented efforts aimed at
reducing the number of improper EIC claims and payments, including the
denial of EIC claims that were not accompanied by valid SSNs. 5 In 2000, IRS
continued these earlier efforts and initiated an EIC education and
compliance strategy that was directed at tax return preparers. Although
these efforts have enabled IRS to identify and stop hundreds of millions of
dollars in erroneous EIC claims, a recent IRS study indicated that IRS might
still be allowing billions of dollars in erroneous EIC claims.

We are making recommendations to the Commissioner of Internal Revenue on
walk- in service, volunteer assistance, forms distribution, and IRS' Web
site. In commenting on a draft of this report, the Commissioner of Internal
Revenue said that IRS would make every effort to resolve the issues noted in
our report. While agreeing generally with our recommendations, the
Commissioner disagreed with parts of two recommendations (although, in one
case, IRS' plans are consistent with our recommendation) and provided
additional perspective that led to a rewording of one recommendation.

5 According to law, an EIC is not to be allowed unless the tax return
contains the EICqualifying child's SSN as well as the SSNs of the taxpayer
and the taxpayer's spouse, if any (26 U. S. C. 32 (c) (1) (F) and (c) (3)
(D)).

Page 4 GAO- 01- 158 IRS' 2000 Filing Season

To assess IRS' performance during the 2000 filing season, we interviewed IRS
officials about ongoing efforts and future plans; analyzed IRS data on
numerous activities, such as the extent to which taxpayers used various
alternative signature and payment alternatives offered by IRS and the
results of IRS efforts to identify and deny improper EIC claims; reviewed
various IRS documents, including operating procedures and reports on program
results and internal research efforts; reviewed data posted to IRS' Web site
and a private study of the site; reviewed reports that an IRS contractor
prepared on customer satisfaction surveys; contacted private organizations
that prepare tax returns and sponsor free tax return filing assistance;
reviewed relevant congressional testimony; and reviewed the results of
relevant audit work done by the Treasury Inspector General for Tax
Administration (TIGTA).

We did our work at IRS' National Office; submission processing centers in
Atlanta, GA, and Kansas City, MO; Customer Service Field Operations and
Customer Service Operations Center in Atlanta; call sites in Atlanta,
Dallas, TX, Jacksonville, FL, Kansas City, KS, and Nashville, TN; and
district office in Georgia. We selected those offices for a variety of
reasons- we selected some because they had management responsibility for the
programs being reviewed, some because of the nature of their workload, and
some because of their proximity to our audit staff.

We did our work from January through October, 2000, in accordance with
generally accepted government auditing standards.

Representatives of several practitioner groups said, either to us or in
congressional testimony, that the 2000 filing season went smoothly. The
results of our review of IRS' return and refund processing operations were
consistent with that assessment. More specifically, our audit work showed
the following:

? According to various indicators that IRS and we have traditionally used to
assess IRS' processing of returns and refunds during the filing season, IRS
generally met or exceeded its processing performance levels in 1999. Among
other things,

? refunds were generally issued within the time frames set by IRS and

? the number of returns filed electronically increased by about 21 percent
compared to 1999. Scope and

Methodology Processing Operations Went Well

Page 5 GAO- 01- 158 IRS' 2000 Filing Season

? Despite the added risks associated with the Year 2000, IRS' tax processing
systems performed slightly better during the 2000 filing season than during
the 1999 filing season.

? Changes that IRS made in an attempt to reduce taxpayer errors and enhance
the processing of returns and payments seemed to have had a positive effect
by, among other things, reducing the number of errors made by taxpayers and
tax return preparers in claiming the Child Tax Credit.

As shown in table 1, IRS, in 2000, generally met or exceeded its processing
performance levels in 1999 for five of seven performance indicators. 6 For a
sixth indicator, IRS did not have data for the 2000 filing season, as
explained in note “d” of the table. Although the seventh
indicator (notice accuracy) seemed to show a decline between 1999 and 2000,
data for the 2 years cannot be compared because they were generated by
different methodologies. (See app. I for a description of the seven
indicators listed in table 1.)

6 IRS set the goals shown in table 1 generally on the basis of previous
experience and projected workload. We did not assess the appropriateness of
IRS' goals nor independently verify the accomplishment data reported by IRS.
However, as part of our reviews of past filing seasons, we assessed IRS'
methodologies for computing several indicators, such as the accuracy and
timeliness of refunds. IRS Indicators Show That

IRS' Performance in Processing Returns and Refunds During the 2000 Filing
Season Was Generally as Good or Better Than in 1999

Page 6 GAO- 01- 158 IRS' 2000 Filing Season

Table 1: IRS' Processing Performance Goals and Related Accomplishments for
the 1999 and 2000 Filing Seasons 1999 a 2000 a Indicator Goal Accomplishment
Goal Accomplishment

Accuracy of individual income tax returns processed by Code and Edit staff b

Process 96% accurately

96.6% were processed accurately Process 96.8%

accurately 96.6% were processed accurately Accuracy of individual income tax
returns processed by data transcribers

Process 94.6% accurately 94% were processed

accurately Process 93.9% accurately 93.9% were processed

accurately Notice accuracy c Provide accurate notices

to taxpayers 98.5% of the time

Provided accurate notices to taxpayers 97.7% of the time

Provide accurate notices to taxpayers 97.4% of the time

Provided accurate notices to taxpayers 96.2% of the time Accuracy of
individual income tax refunds on paper returns Process 99.3%

accurately 99.6% were processed accurately Process 99.3%

accurately Data not available d Timeliness of refunds for individual income
tax returns filed on paper

Baseline year e Processed 84. 7% of the refunds in 40 days or less

Process 85% of the refunds in 40 days or less

Processed 92. 1% of the refunds in 40 days or less Timeliness of refunds for
individual income tax returns filed electronically

Process 98% of the refunds in 21 days or less

Processed 99. 6% of the refunds in 21 days or less

Process 99% of the refunds in 21 days or less

Processed 100% of the refunds in 21 days or less Percentage of individual
income tax returns filed electronically Receive 23% of returns

electronically Received 23.4% of returns electronically as of 10/ 29/ 99

Receive 26.5% of returns electronically Received 27.7% of

returns electronically as of 10/ 27/ 00 a Data are as of April 1999 and
April 2000, unless otherwise noted.

b Code and Edit staff are to prepare paper returns for computer entry by,
among other things, ensuring that all data are present on the return and
legible. c In 1999 and previous filing seasons, the methodology used to
calculate the notice accuracy indicator

excluded systemic errors caused by computer hardware or software and errors
not under the control of the service center because IRS wanted to measure
how well staff were performing. For the 2000 filing season, IRS changed the
methodology to include systemic errors because IRS believes that their
inclusion provides a better measure of the quality of notices sent to
taxpayers. According to IRS, a change in the computer systems used to track
and calculate the indicator prevented IRS from recalculating the 2 years of
data to provide comparable information. Therefore, results for 1999 and 2000
should not be compared for trend analysis. d According to IRS, it had no
information on the percentage of individual income tax returns filed on
paper that were processed accurately during the 2000 filing season because a
contractor did not provide the computer programming needed to capture the
data. e According to IRS, fiscal year 1999 was a baseline year; therefore,
no performance goal was

established. Source: GAO summary of IRS data.

We focused our attention on two areas covered by IRS' indicators- refund
timeliness and the use of electronic filing.

A major part of IRS' processing effort is directed at issuing refunds. In
that regard, about 70 percent of the individual income tax returns processed
by IRS in 2000 involved refund claims. Refunds Generally Issued

Within Established Time Frames

Page 7 GAO- 01- 158 IRS' 2000 Filing Season

IRS' goals for the 2000 filing season were to process (1) 85 percent of the
refunds on paper returns within 40 days and (2) 99 percent of the refunds on
electronic returns within 21 days. IRS exceeded both of those goals and, in
doing so, exceeded its accomplishments in 1999. The improvement over 1999
was especially significant for paper returns, where IRS' performance
increased from 84. 7 percent to 92.1 percent.

According to cognizant IRS staff, a new methodology for computing the
timeliness of refunds on paper returns has been proposed that would change
the date from which IRS starts counting. IRS had been using the signature
date on the return as the starting point. However, because IRS felt that the
signature date did not always reflect when the return was mailed, the
proposed methodology calls for using the date IRS receives the return as the
starting point. We do not know how many of the refunds that exceeded the 40-
day goal during the 2000 filing season would have met the goal if IRS had
been using the proposed methodology. As of September 20, 2000, that proposal
was still under consideration.

IRS first began receiving individual income tax returns electronically in
1986. Electronic filing enables taxpayers to file more accurate returns and
get their refunds faster and provides taxpayers with evidence that IRS has
received their returns. Electronic filing also reduces the number of errors
IRS has to correct because (1) checks are built into the electronic filing
system that are designed to catch certain taxpayer errors, such as
computational mistakes, in advance so that they can be corrected by the
taxpayer before IRS takes possession of the return and (2) returns filed
electronically bypass the more error- prone manual procedures that IRS uses
to process paper returns.

The number of individual income tax returns filed electronically has been on
an upward trend since 1995, during which time the number of electronic
returns increased by 200 percent (from 11.8 million in 1995 to 35.4 million
in 2000). The 35.4 million electronic returns filed in 2000 represent an
increase of about 21 percent compared to the number filed in 1999.

There are currently three types of electronic filing: (1) traditional,
whereby taxpayers transmit returns to IRS through a third party (such as a
tax return preparer); (2) TeleFile, whereby taxpayers send returns directly
to IRS over telephone lines using a Touch- Tone telephone; and (3) on- line,
whereby taxpayers send returns to IRS through an on- line intermediary using
a personal computer and commercial software. As shown in table 2, Use of
Electronic Filing

Continued to Grow

Page 8 GAO- 01- 158 IRS' 2000 Filing Season

the use of traditional and on- line filing increased in 2000, while the use
of TeleFile decreased for the second year in a row.

Table 2: Number of Individual Income Tax Returns Received, by Filing Type

Number of returns in thousands

Filing type 1/ 1/ 98 to

10/ 30/ 98 1/ 1/ 99 to

10/ 29/ 99 Percentage change:

1998 to 1999 1/ 1/ 00 to

10/ 27/ 00 Percentage change:

1999 to 2000

Paper 98,453 96,178 -2.31 92,322 -4.01 Electronic

Traditional 17,697 21,227 19.95 25,211 18.77 TeleFile a 5,963 5,665 -5.00 5,
161 -8.90 On- line 942 2,457 160.83 5,022 104.40

Subtotal 24,602 29,349 19.30 35,394 20.60 Total 123,055 125,527 2. 01
127,716 1.74 Percentage of total electronically filed 20.1 23.4 - 27.7 a

An IRS research report attributed at least some of the decrease in TeleFile
use between 1998 and 1999 to tax law changes that enabled certain taxpayers
to take a student loan interest deduction or an education credit. Persons
claiming such a deduction or credit were no long eligible to use TeleFile.
Research data on the decrease in TeleFile use between 1999 and 2000 were not
available at the time we completed our audit work.

Source: IRS' Management Information System for Top Level Executives.

Besides the belief that taxpayers are becoming more familiar and comfortable
with computer technology and electronic filing, IRS officials cited several
factors that contributed to the increase in electronic filing in 2000,
including IRS' expansion of initiatives to make electronic filing paperless,
and thus more appealing to taxpayers and tax return preparers. Those
factors, with an emphasis on the paperless initiatives, are discussed in
appendix II.

The performance of systems that IRS uses for processing tax returns was of
particular interest in 2000 because of the massive changes that IRS made to
help ensure that its systems were Year 2000 compliant. Completing these
changes involved correcting millions of lines of application software and
upgrading or replacing thousands of computer hardware and software products.
Although it extensively tested these changes, IRS anticipated that
unexpected system- related problems might occur during the 2000 filing
season that could affect service to taxpayers.

As we reported in June 2000, although there were some relatively minor
problems, IRS performance data and comments from IRS officials and Tax
Processing Systems

Performed Slightly Better Than in 1999

Page 9 GAO- 01- 158 IRS' 2000 Filing Season

representatives of large tax practitioners indicated that IRS' tax
processing systems performed slightly better during the 2000 filing season
than in 1999. 7 At the time that we prepared our June report, IRS had
identified four system- related problems that affected relatively few
individual taxpayers. IRS officials said that they had (1) corrected the
four problems, (2) taken or were taking action to mitigate the effects on
taxpayers, and (3) notified individuals affected by two of the four
problems. One reason IRS officials cited for not always notifying affected
individuals was that IRS could not quickly generate correspondence to
address the problem. In preparing this report, we followed up with IRS
officials about the potential impact of systems modernization on IRS'
ability to more quickly notify taxpayers. They told us that systems
modernization may enable IRS to more quickly develop customized taxpayer
correspondence to address specific problems but may not reduce the time
involved in identifying taxpayers affected by the problems because IRS still
would need to develop unique software programs for that purpose.

After we completed our audit work for the June 2000 report, IRS officials
told us of a fifth system- related problem. That problem involved the
freezing of 27,493 refunds because they were mistakenly identified as
involving an injured spouse. 8 According to IRS, it identified the problem
on February 12, corrected it on February 20, and generated the refunds
within a week.

IRS made several changes for the 2000 filing season in an attempt to reduce
the number of taxpayer errors and enhance its processing efforts. Of
particular note, IRS

? simplified the Child Tax Credit worksheet for 2000, which contributed to a
decrease of 37 percent in the number of Child Tax Credit errors made by
taxpayers and tax return preparers;

? revised the criteria for filing Schedule D (Capital Gains and Losses),
which likely contributed to a reduction in the number of Schedule Ds that
IRS had to process in 2000;

7 GAO/ GGD- 00- 146. 8 IRS defines an injured spouse as the person whose
portion of the overpayment on a joint return was, or will be, applied
against a tax or non- tax debt (e. g., a student loan) for which he or she
is not liable. IRS Made Several Changes

to Reduce Taxpayer Errors and Enhance Processing

Page 10 GAO- 01- 158 IRS' 2000 Filing Season

? had taxpayers who were getting refunds mail their returns to a different
address than taxpayers who were making payments so that IRS could better
identify returns with remittances; and

? began checking the validity of secondary taxpayers' SSNs, 9 which resulted
in about 36,000 notices to taxpayers about invalid SSNs. 10

These changes are discussed more fully in appendix III. IRS has various ways
to help taxpayers meet their filing requirements. These ways include (1)
call sites that assist taxpayers who telephone IRS with questions about the
tax law, their accounts, or their refunds; (2) walkin sites where, among
other things, taxpayers can get answers to questions and help in preparing
their returns; (3) IRS- sponsored volunteer organizations that provide
return preparation assistance and other help to eligible taxpayers; (4) IRS'
Web site on the Internet, which, among other things, enables taxpayers to
get answers to tax law questions via electronic mail (E- mail); and (5)
various outlets through which taxpayers can receive tax forms and
publications.

Table 3 shows 1999 and 2000 performance data for various customer service-
related indicators that IRS and we have used in the past to assess the
filing season. 11 IRS also has a new indicator for the quality of service
provided by its walk- in sites. However, as discussed later in this report,
IRS did not have data on that measure for the 2000 filing season at the time
we completed our audit work. (See app. I for a description of the five
indicators listed in table 3.)

9 SSNs are assigned by the Social Security Administration and used by IRS to
identify individual taxpayers. In the case of a joint return, the person
whose name appears first on the return is considered the primary taxpayer.
The other person is considered the secondary taxpayer.

10 IRS considers an SSN invalid if it is missing from the return or if the
SSN and associated name on the return do not match data in the Social
Security Administration's records. 11 IRS set the goals shown in table 3
generally on the basis of previous experience and projected workload. We did
not assess the appropriateness of IRS' goals nor independently verify the
accomplishment data reported by IRS. However, as part of our reviews of past
filing seasons, we assessed IRS' methodologies for computing several
indicators, such as toll- free telephone service and tax law accuracy.
Improvements Made

in Assisting Taxpayers and Measuring Performance, but More Can Be Done

Page 11 GAO- 01- 158 IRS' 2000 Filing Season

Table 3: IRS' Customer Service Performance Goals and Related Accomplishments
for the 1999 and 2000 Filing Seasons 1999 a 2000 a Indicator Goal
Accomplishment Goal Accomplishment

Level of service provided by toll- free taxpayer service telephone system

Baseline year b Provided 54% level of service Provide 58% level of

service Provided 63% level of service Tax law accuracy rate for taxpayer
inquiries (toll- free) c Answer 85% of

taxpayers' questions accurately

Answered 73.8% accurately Answer 80% of

taxpayers' questions accurately

Answered 71.9% accurately

Accuracy with which forms distribution centers process taxpayer orders

Process 96.5% accurately Processed 97%

accurately Process 96.5% accurately Processed 98%

accurately Customer satisfaction with toll- free telephone service e
Baseline year b Average overall

satisfaction of 3.55 on a 4- point scale (as of 3/ 99)

Not applicable d Average overall satisfaction of 3.50 on a 4- point scale
(as of 3/ 00)

Customer satisfaction with walk- in service f Baseline year b Average
overall

satisfaction of 6.44 on a 7- point scale (as of 3/ 99)

Average overall satisfaction of 6.5 on a 7- point scale

Average overall satisfaction of 6.48 on a 7- point scale (as of 3/ 00)

Note: Similar tables in our reports on past filing seasons included an
indicator that is not included in this year's table. In this table, we
dropped “level of access to taxpayer service telephone system”
because IRS has adopted level of service as its key performance measure and
has discontinued use of the level of access indicator. a Data on
accomplishments are as of April 1999 and April 2000, unless otherwise noted.

b According to IRS, it used fiscal year 1999 as a baseline; therefore, no
performance goal was established. c Data for the tax law accuracy indicator
are compiled on a fiscal year basis. Data for 1999 are from

October 1, 1998, to April 30, 1999, and data for 2000 are from October 1,
1999, to April 30, 2000. d IRS originally set its goal for 2000 as an
average overall satisfaction score of 6. 3 on a 7- point scale.

However, the survey was subsequently automated, and the rating scale was
changed to a 4- point scale. Because we could not convert IRS' original goal
to the 4- point scale, we did not include a goal in the table. The
contractor responsible for the survey recomputed the rating data for 1999 to
reflect the new scale. e In a September 2000 report, TIGTA concluded that
these data, which were generated by surveying a sample of callers, were not
statistically valid. TIGTA said that management controls were insufficient
and, among other things, raised questions about the sampling methodology.
IRS management disagreed with TIGTA's conclusions. f As discussed later in
this report, TIGTA raised concerns about the statistical validity of these
reported

accomplishments. Source: GAO summary of IRS data.

Concerning IRS' various modes of assistance, we noted the following:

? Although taxpayers were better able to reach IRS over the telephone in
2000 compared to 1999, IRS' performance in providing telephone service was
still below the level achieved in 1998.

Page 12 GAO- 01- 158 IRS' 2000 Filing Season

? IRS implemented measures for assessing the performance of its walk- in
sites but still lacked some critical information, such as reliable data on
customer satisfaction.

? IRS procedures provided for assessing the quality of returns prepared by
volunteer sites. However, IRS had no measures for assessing the timeliness
of service provided by the sites or taxpayer satisfaction with those
services. Also, (1) IRS district offices were required to visit each
volunteer assistance site but were not given specific guidance as to what to
review during those visits and (2) late delivery of computer equipment and
training materials hampered the ability of volunteer sites to effectively
serve taxpayers.

? Data on IRS' Web site showed increased use and improved performance in
2000 compared to 1999, but some information on the site was obsolete or
inconsistent.

? IRS' performance measures did not adequately reflect the timeliness with
which IRS' area distribution centers responded to taxpayers' orders of forms
and publications.

One of the most important services IRS provides all year, but especially
during the filing season, is toll- free telephone assistance. For 24 hours a
day, 7 days a week during the filing season, taxpayers can call IRS with
questions about the tax law, their accounts, or their refunds. A key
indicator of IRS' performance in providing telephone service is the ability
of taxpayers to reach IRS so that they can get their questions answered. IRS
refers to that indicator as “level of service.” 12

We reported last year that although IRS made several changes in an effort to
improve its telephone service, 13 its level of service in 1999 declined
compared to 1998. 14 Some of the decline was attributed to (1) IRS'
unrealistic assumptions about the implementation and impact of its changes
and (2) other problems it had in managing staff training and

12 Level of service is calculated by dividing the number of calls answered
by the total call attempts. Answered calls include calls to a voice
messaging system that were subsequently returned by IRS. Total call attempts
is the sum of calls answered, calls abandoned by the caller before receiving
assistance, and calls that receive a busy signal.

13 Among other things, IRS extended its hours of operation from 16 hours a
day, 6 days a week, to 24 hours a day, 7 days a week, and implemented new
call routing technology. 14 Tax Administration: IRS' 1999 Tax Filing Season
(GAO/ GGD- 00- 37, Dec. 15, 1999). Although Taxpayers'

Ability to Reach IRS Over the Telephone Improved in 2000, IRS' Performance
in Providing Telephone Service Was Still Below Levels Achieved in 1998

Page 13 GAO- 01- 158 IRS' 2000 Filing Season

scheduling and implementing new technology. As shown in table 4, IRS
improved its level of service in 2000 by answering 28.2 million of the 45.7
million call attempts that taxpayers made from January 1 to April 29, 2000-
a 62- percent level of service. 15 However, that level of service was still
considerably below the 72- percent level provided in 1998. Although the
volume of incoming calls was similar for both 1998 and 2000, IRS answered
about 4.7 million fewer calls in 2000 than in 1998.

Table 4: Accessibility of IRS' Telephone Assistance Filing season Call
attempts Calls answered Busy signals Calls abandoned a Level of service

1998 45,613,506 32,952,838 4, 050,632 8,610,036 72% 1999 62,674,009
31,992,784 21,588,292 9, 092,933 51 2000 45,696,667 28,236,278 9, 218,261
8,242,128 62

Change from 1999 to 2000 (16,977,342) (3,756, 506) (12,370,031) (850,805) 11

Note: Data cover periods from January 1 to May 2, 1998; May 1, 1999; and
April 29, 2000, respectively. a These are calls in which the taxpayer hung
up before getting assistance.

Source: IRS' Weekly Customer Service Report.

The ability of taxpayers to reach IRS so they can get their questions
answered is one important measure of telephone service. Another important
measure is the accuracy of those answers. IRS measures the accuracy of
information provided by its telephone assistors by monitoring a sample of
taxpayer calls and determining, for each of the monitored calls, whether the
assistor responded accurately and followed correct procedures. 16 The
monitoring results for calls involving tax law questions showed an accuracy
rate of 71.9 percent for the 2000 filing season- below IRS' goal of 80
percent and, considering the confidence intervals

15 The level- of- service figures in table 4 differ from the level- of-
service figures in table 3 because IRS' official level- of- service
indicator, which is shown in table 3, covers more telephone lines than we
used in compiling table 4 data. We limited table 4 data and the accompanying
discussion to the three main customer service- related telephone lines.
These are the lines that taxpayers can call to ask a question about the tax
law or IRS procedures (1- 800- 829- 1040), resolve issues relating to their
accounts (1- 800- 829- 8815), or inquire about their refunds (1- 800- 829-
4262).

16 Because a response can be counted as inaccurate if an assistor failed to
follow required procedures (such as not asking all of the required probing
questions), an answer can be correct even if it is considered incorrect for
monitoring purposes. If an assistor fails to ask all of the required probing
questions, for example, there is no certainty that the taxpayer provided all
of the necessary information on which to base an answer.

Page 14 GAO- 01- 158 IRS' 2000 Filing Season

surrounding the results of IRS' sample, not statistically different from the
73.8- percent performance level achieved in 1999.

We conducted a separate review of the key factors that affected IRS'
performance in providing toll- free telephone service during the 2000 filing
season and expect to issue a separate report to the Subcommittee early in
2001. We are also preparing a report for the Subcommittee on various human
capital issues associated with IRS' toll- free telephone service, which we
also expect to issue early in 2001.

IRS' walk- in sites answer tax law questions, distribute tax forms and
publications, and help taxpayers prepare tax returns and resolve account
issues. IRS data show that its walk- in sites served about 5.8 million
taxpayers between January 1 and April 22, 2000- a 5- percent decrease from
the about 6.1 million taxpayers served during the same time period in 1999.

In our report on the 1999 filing season, we pointed out that IRS had not
made much progress in measuring the performance of walk- in sites. 17 We
recommended that IRS implement a performance measurement program and, as
part of that program, require that quality reviews be done and data on the
results of quality reviews and wait- time monitoring be reported to a
central location for analysis. For the 2000 filing season, IRS (1)
instituted a quality review program for assessing the accuracy of services
provided by walk- in staff, the results of which are reported to a central
location, and (2) began requiring centralized reporting of wait- time data,
although certain factors affected the data's usefulness. IRS also conducted
a walk- in customer satisfaction survey during the 2000 filing season but,
according to TIGTA, IRS had not established an adequate management process
to ensure that the survey was conducted appropriately.

For 2000, IRS' National Office instituted quality reviews of its walk- in
sites. A team of 32 reviewers, posing as taxpayers, were to visit walk- in
sites and act out various scenarios that would require assitors to help the
“taxpayers” prepare their return or resolve an account problem.
The reviewers were to complete a checksheet covering issues such as

17 GAO/ GGD- 00- 37. IRS Implemented Walk- In

Service Performance Measures but Still Lacked Some Critical Information

IRS Instituted a Quality Review Program for Walk- In Sites

Page 15 GAO- 01- 158 IRS' 2000 Filing Season

? did the assistor indicate a willingness to help by using an appropriate
phrase such as “May I help you?” and

? did the assistor provide a complete and accurate response, explaining any
procedures and ordering the necessary forms and publications?

The reviewers made 272 visits between late- October 1999 and mid- January
2000 and another group of visits during the 2000 filing season. As described
by IRS, results from the first group of visits “indicated significant
opportunity to improve our quality results.” Specifically, the results
showed an error rate (incorrect answers) of 50 percent and indicated that
reviewers were denied service in 21 percent of the visits (e. g., reviewers
were told to take a form or publication and figure out the answer
themselves). Several recommendations for improving performance were set
forth, including an intensive back- to- basics training program and
increased managerial oversight. Results from the second group of visits were
not available at the time we completed our audit work.

The National Office established taxpayer wait- time goals of 30 minutes for
return preparation and 15 minutes for all other services during the 1998,
1999, and 2000 filing seasons. In our reports on IRS' 1998 and 1999 filing
seasons, we reported that although IRS monitored walk- in sites' timeliness,
it did not require that monitoring results be reported to the National
Office. 18 During the 2000 filing season, IRS did require that its four
regional offices submit monthly reports on timeliness to the National
Office. However, three factors adversely affected the usefulness of the
timeliness data.

First, even though IRS required that timeliness data be reported to the
National Office, it did not specify what percentage of the time sites were
to meet the 15- and 30- minute wait- time goals. The Southeast Region
established its own goal, which called for districts in that region to meet
the wait- time goals 90 percent of the time. According to Southeast regional
analysts we talked with during the filing season, most of the nine districts
in that region were meeting or exceeding the 90- percent goal. The analysts
said that some districts were experiencing problems meeting the wait- time
goals because of an unanticipated increase in the number of taxpayers
visiting the walk- in sites for return preparation.

18 Tax Administration: IRS' 1998 Tax Filing Season (GAO/ GGD- 99- 21, Dec.
31, 1998) and GAO/ GGD- 00- 37. IRS Monitored Wait Times at

Walk- In Sites, but Various Factors Adversely Affected the Usefulness of
Monitoring Results

Page 16 GAO- 01- 158 IRS' 2000 Filing Season

Second, wait times at most walk- in sites were computed manually, which made
the results more prone to error. To enable more accurate tracking of wait
times, IRS has installed an automated wait- time tracking system known as Q-
Matic at some walk- in sites. During the 2000 filing season, 76 (or 18
percent) of IRS' 417 walk- in sites had that system. As customers arrive at
walk- in sites with the Q- Matic system, they are to obtain a numbered
ticket from the Q- Matic ticket printer. The ticket reflects the estimated
wait time for the service, and the system automatically “calls”
the customer when it is his or her turn. The system records the time that a
customer received a ticket and the time that an assistor started helping the
customer. Non- Q- Matic sites used manual systems to record wait times. At
some of those sites, a greeter or receptionist was to record on a taxpayer
contact card the time that the taxpayer arrived, and an assistor was to
record on the same card the time that he or she started to fill out a sign-
in sheet. Other non- Q- Matic sites relied on greeters or taxpayers to fill
out a sign- in sheet.

A third factor that affected the usefulness of wait- time data reported by
the regional offices, according to a cognizant IRS official, was the use of
different reporting formats by the regions.

IRS conducted a customer satisfaction survey at all walk- in sites in
January 2000 and every fifth week thereafter, which amounted to 1 week
during each month of the filing season. Results of the walk- in surveys
completed in January, February, and March, 2000, as summarized by IRS'
contractor responsible for analyzing survey results, showed that 91 percent
of the respondents rated their overall satisfaction with the handling of
their case at 6 or 7 on a 7- point scale and that the average overall
satisfaction rating was 6.48. The survey results also showed that

? the three primary reasons why respondents visited a walk- in site were to
get help preparing their returns (28 percent), ask a tax question (22
percent), and pick up a form or publication (21 percent); IRS Did Not
Adequately

Measure Customer Satisfaction at Walk- In Sites

Page 17 GAO- 01- 158 IRS' 2000 Filing Season

? 72 percent of the respondents waited less than 15 minutes to be served, 21
percent waited between 15 and 30 minutes, and 7 percent waited more than 30
minutes; 19 and

? taxpayers whose wait time was less than 15 minutes gave higher
satisfaction ratings than did customers who waited longer.

Although the survey results showed that respondents were generally satisfied
with IRS' assistance, only about 3 percent of the taxpayers who visited
walk- in sites between January and March, 2000, responded to the survey. In
that regard, TIGTA, in a May 2000 report, concluded that “while the
Walk- In Customer Satisfaction Survey may be an effective marketing tool to
gauge taxpayers' satisfaction with the services provided by the IRS Walk- In
offices, the Survey results are not statistically valid.” 20
Specifically, TIGTA found the following:

? Survey forms were not offered to all taxpayers during the survey weeks, as
was required. During visits to selected walk- in offices, TIGTA officials
posing as taxpayers were offered a survey form only 8 percent of the time.

? There were no controls to prevent tampering with the survey responses, and
IRS had not established controls to ensure that all walk- in offices
participated in the survey.

? Three different IRS functions provided oversight for the survey, but none
of them appeared to be accountable for the survey results.

TIGTA recommended that IRS improve the process for overseeing the walk- in
customer satisfaction survey to ensure that the survey is properly
administered and that the results are accurate, valid, and reliable. In a
May 22, 2000, memorandum to TIGTA, the Commissioner of Internal Revenue said
that IRS would (1) stress the importance of providing the survey to all
taxpayers who are helped; (2) determine the level of employee understanding
of the survey process and provide additional training that reinforces the
importance of surveying all customers and the need to adhere to instructions
in the Internal Revenue Manual for survey

19 The contractor's summary did not indicate whether the 28 percent who
waited for 15 minutes or more were at the site for return preparation
assistance. However, perhaps coincidentally, the summary did show that 28
percent of the respondents visited the walkin site for help in preparing
their returns. As previously noted, IRS' wait- time goals are 30 minutes for
return preparation and 15 minutes for all other services.

20 Walk- in Customer Satisfaction Survey Results Should be Qualified if Used
for the GPRA, TIGTA, Reference No. 2000- 10- 079, May 17, 2000.

Page 18 GAO- 01- 158 IRS' 2000 Filing Season

procedures; and (3) issue program guidance to field offices that provides
direction to management on establishing controls to protect survey forms,
the integrity of the data, and the survey results.

In addition to the help that is available to taxpayers over the telephone
and at walk- in sites, taxpayers can receive assistance from various
IRSsponsored volunteer sites. Two major volunteer assistance efforts are the
Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the
Elderly (TCE) programs- both of which provide free tax return preparation
assistance. VITA offers free tax help to persons with low to limited income,
persons who are non- English- speaking, elderly taxpayers, and persons with
disabilities. TCE offers free tax help to elderly taxpayers. According to
IRS data as of June 30, 2000, about 3.3 million taxpayers were assisted at
about 17,600 VITA and TCE sites.

Considering the significant role played by the VITA and TCE programs in
helping taxpayers meet their filing responsibilities, it is important that
IRS take reasonable steps to ensure that the assistance provided by those
programs is timely and accurate. According to the Internal Revenue Manual,
“ . . . critical to management of volunteers are: proper training;
communication of expectations; review, evaluation and feedback of work
performed; and recognition of performance.”

In that regard, we noted the following:

? IRS procedures provided for assessing the quality of returns prepared by
volunteer sites. In commenting on a draft of this report, IRS said that the
accuracy rate for VITA sites was 97.8 percent and the rate for TCE sites was
95.4 percent.

? IRS did not have measures for assessing the timeliness of service provided
by the volunteer sites or taxpayer satisfaction with those services.

? Although district office representatives were to make monitoring visits to
volunteer sites within their jurisdiction during the filing season, they
were not given specific guidance as to what to examine during these visits.

? Much of the computer hardware and software and training materials was not
delivered in a timely fashion to the VITA and TCE sites. According to IRS
officials, these problems affected the sites' ability to serve taxpayers
effectively. For example, three of IRS' four regions reported that the
untimely receipt of equipment hampered their sites' electronic filing
activities. One region stated that the “equipment did not arrive
timely, and in many cases, so late that it was useless to field for this
past filing season. Volunteer Assistance

Programs Might Benefit From Increased IRS Attention

Page 19 GAO- 01- 158 IRS' 2000 Filing Season

A majority of the equipment did not arrive in working condition as some were
completely missing operating systems, or had the wrong adapters for keyboard
plug- in.” At the time we completed our audit work, IRS had not
responded to our questions about the reasons for these problems and what was
being done to prevent their recurrence in 2001.

Among other things, IRS' Web site offers taxpayers hundreds of tax forms and
publications for downloading, current information on tax issues, details
about electronic filing, and the opportunity to submit tax law and
procedural questions via E- mail. Various data generated by IRS and others
indicate that IRS' Web site was used more and performed better in 2000 than
in 1999. Our review of information on the Web site indicated that the site's
usefulness was somewhat impaired by the presence of obsolete or inconsistent
data.

Taxpayers used IRS' Web site significantly more in fiscal year 2000 than in
fiscal year 1999. As of June, (1) the number of “hits” had
increased 31 percent- 1.3 billion in 2000 compared to about 983 million in
1999 21 -and (2) the number of downloaded files had increased 62 percent-
about 115 million in 2000 compared to about 71 million in 1999. Also, the
number of E- mail questions received during the 2000 filing season increased
by 41 percent- 218,405 compared to 155,421 for the 1999 filing season.

Keynote- an independent Web site rater and recognized authority on Internet
performance- reviewed IRS' Web site during the week of March 27, 2000, and
reported that the site was coping well with demands of the filing season and
performing well overall. The independent rater found that the home page was
delivered in 2.7 seconds on average, and the site had an availability rate
of 96.8 percent from March 27 through March 31 (Monday through Friday). The
average delivery time for April 1 and April 2 (Saturday and Sunday) was 2.62
seconds, with an availability rate of 98.9 percent. A similar review done in
1999 for Monday, April 12, through Friday, April 16, showed delivery times
that ranged from 5.39 seconds to 14.45 seconds and availability rates that
ranged from 93.6 percent to 97. 4 percent. 22 Although these results
indicate improved performance in 2000, it is unclear how much, if any, of
the apparent improvement is due to

21 31 percent does not compute due to rounding. 22 Weekend performance was
not rated in 1999. Data on IRS' Web Site

Showed More Use and Improved Performance Compared to 1999, but Some
Information on the Site Was Obsolete or Inconsistent

Use of IRS' Web Site Increased, Performance Improved

Page 20 GAO- 01- 158 IRS' 2000 Filing Season

different measurement periods. Unlike in 2000, the site's performance in
1999 was measured during the last week of the filing season when demands on
the Web site might be heavier.

One important feature of IRS' Web site is the ability of taxpayers to ask
tax law and procedural questions of IRS via E- mail. At a March 2000
Oversight Subcommittee hearing, witnesses representing two practitioner
organizations spoke positively about this feature.

IRS data indicate that IRS was more timely in responding to taxpayers'
questions during the 2000 filing season than it was in 1999. For the 2000
filing season, IRS took an average of 1.3 business days to respond to
taxpayers E- mail questions compared to an average of 2.7 business days
during the 1999 filing season. During the 2000 filing season, IRS responded
90.5 percent of the time within its goal of 2 business days compared to 69.2
percent of the time during the 1999 filing season. Although IRS improved its
overall timeliness, there were certain types of questions (generally those
involving more complex topics) for which IRS did not meet the 2 business day
goal. For example, questions dealing with trusts averaged 5.8 business days,
questions about aliens and U. S. citizens living abroad averaged 4.6
business days, and estate and gift tax questions averaged 3.2 business days.

Accuracy is another important measure of IRS' performance in responding to
E- mail questions. IRS data on the results of its quality reviews of
responses to E- mail questions during the 2000 filing season showed that 76
percent of the 1,321 responses reviewed between January and April were
correct (IRS' accuracy goal for all of fiscal year 2000 was 79 percent). In
September 2000, TIGTA reported on the results of a test it conducted between
March and June, 2000. 23 For that test, TIGTA E- mailed to IRS and to 3
commercial Internet Web sites that offer free tax advice, 50 questions
relating to issues affecting small businesses and/ or self- employed
individuals. According to TIGTA, IRS responded correctly to 54 percent of

23 Management Advisory Report: Comparison of Responses to Small Business/
Self- Employed Taxpayer Questions from the Electronic Tax Law Assistance
Program and other Internet Tax Law Services, TIGTA, Reference No. 2000- 30-
126, Sept. 21, 2000.

Page 21 GAO- 01- 158 IRS' 2000 Filing Season

the questions while the commercial Web sites provided correct answers 47
percent of the time. 24

In another report, TIGTA noted that although IRS had statistically valid
nationwide data on the accuracy of responses to E- mail questions, its
sampling plan was insufficient to produce statistically valid data for
assessing the performance of each of the 10 sites that respond to E- mail
questions. 25 TIGTA recommended that IRS design a sampling plan to provide
accuracy rates at the call- site level as well as the national level.

All E- mail customers are to be given the opportunity to respond to a
customer satisfaction survey. According to IRS data, of the about 4,300
taxpayers who responded to the survey between January 1 and April 17, 2000,
(1) 94 percent said that they were satisfied with the time it took to get a
response; (2) 78 percent said that the response they received answered their
question; and (3) 93 percent said that they would use the Email system in
the future.

We found several instances of data on IRS' Web site that were either
obsolete or inconsistent. For example:

? In the “IRS Newsstand” part of the site, there is a section
entitled “Tax Calendar for Small Businesses.” When we looked at
that section in June 2000, we found a calendar for 1999 but no calendar for
2000.

? In the “Around the Nation” section of the site, there are one
or more pages for all but one state. When we checked in June 2000, we found
that the pages for four states still had data posted showing events that
took place in 1999. There were also some inconsistencies between the dates
of Problem Solving Days posted on the Problem Solving Days part of the Web
site and the dates posted on some individual state pages. For example, as of
June 22, 2000, one state's page showed no Problem Solving Days in that state
after March 2000, but the Problem Solving Days page showed that

24 The lower IRS accuracy rate in TIGTA's study (54 percent) compared to the
rate resulting from IRS' quality reviews (76 percent) could be due to
different methodologies. IRS' quality review results are based on a
statistical sample of all questions received. TIGTA's study involved test
questions specifically related to small businesses and/ or self- employed
individuals, which, according to TIGTA, may be more complex than normal
individual income tax questions.

25 Management Advisory Report: Enhancing the Electronic Tax Law Assistance
Program, TIGTA, Reference No. 2000- 30- 164, Sept. 28, 2000. Some Data on
IRS' Web Site

Were Obsolete or Inconsistent

Page 22 GAO- 01- 158 IRS' 2000 Filing Season

days were scheduled in that state for June and July. Such inconsistencies
could cause users of the Web site to get incorrect information depending on
which page they accessed.

? Some state pages included more information than others. Although this kind
of inconsistency is not a problem in and of itself, some of the
inconsistency involved basic information that we thought should be a part of
every state page. For example, of 56 state pages (1 state had no page, 4
states had more than 1 page, and the District of Columbia had 1 page), 40
had information on walk- in site locations, while 16 had no such
information. As a result, taxpayers in some states were able to get
information on IRS walk- in locations from the Web site while taxpayers in
other states were not.

An official from IRS' Electronic Information Services Office told us that
there was no one person responsible for ensuring that data on the Web site
were current and consistent. Each office that placed data on the site was
responsible for ensuring that the data were accurate and up- to- date. Thus,
for example, there was no one responsible for ensuring that information
entered on a particular state page by one of IRS' district offices was
consistent with information on the Problem Solving Day part of the Web site
that had been entered by another office.

IRS provides various means through which taxpayers can obtain copies of
forms and publications to help them prepare their tax returns. We have
already discussed two of those means- IRS' walk- in sites and Web site.
Table 5 identifies other channels through which IRS distributes forms and
publications and, for each of those channels, shows comparative data for the
1999 and 2000 filing seasons. Performance Measures Did

Not Adequately Reflect the Timeliness With Which IRS Responded to Taxpayers'
Orders of Forms and Publications

Page 23 GAO- 01- 158 IRS' 2000 Filing Season

Table 5: IRS Forms and Publications Distribution Channels Distribution
channel and unit of measure 1999 filing season 2000 filing season

Percentage change: 1999 to 2000

Area distribution centers- orders filled a 7,345, 000 5,042,000 -31.4 Bank,
Post Office, and Library (BPOL) Program- outlets b 42,529 41,971 -1.3
Community Based Outlet Program- outlets c 3,490 10,193 192 TaxFax Program-
successful faxes d 970,379 1, 089,603 12 Corporate Partnership Program e

Corporations 2,153 2,386 11 Employees 14,428,232 15,443,729 7

a IRS' three area distribution centers send forms and publications to
taxpayers in response to their mail and telephone orders. b Through the BPOL
Program, IRS partners primarily with post offices and libraries to
distribute forms.

Although still called the BPOL Program, IRS no longer recruits banks to
participate. According to a cognizant IRS official, IRS has significantly
improved its relationship with libraries and post offices over the last few
years, so the decline in participating BPOL outlets between 1999 and 2000
should not be viewed as a trend. c Through the Community Based Outlet
Program, IRS partners with newspapers, copy centers, credit

unions, and grocery stores to distribute forms. d The TaxFax Program enables
taxpayers to order and receive forms and instructions from IRS via a fax
machine. e The Corporate Partnership Program enables employees of
participating corporations to obtain copies

of IRS forms and publications at their work sites. Source: IRS.

Of the various distribution channels listed in table 5, we focused most of
our audit work on the performance of the area distribution centers in
filling taxpayers' orders. Taxpayers can order forms and publications from
the distribution centers either by mail or by calling a toll- free telephone
number. In the tax packages mailed to taxpayers before the filing season,
IRS tells taxpayers how to order forms and publications from the area
distribution centers and that they should expect to receive the documents
within 10 days after IRS receives their order.

According to IRS data for January 1 through April 30, 2000, the three area
distribution centers filled about 5 million orders for forms and
publications, filled 98 percent of the orders accurately, and took no longer
than 2.6 days on average to fill those orders. 26 However, the latter
measure

26 According to IRS data, the average order- filling time varied from week
to week and ranged from less than a day to about 2.6 days.

Page 24 GAO- 01- 158 IRS' 2000 Filing Season

does not provide a reliable basis for judging how well IRS met its 10- day
goal because the measure (1) does not track order- filling time from when
IRS received the order, only from when an order was assigned a
“picking” number for processing, and (2) reflects turnaround
time only for inventory on hand and not for forms or publications that were
out of stock and, thus, had to be backordered. Regarding backorders, there
were several significant stockouts during the 2000 filing season, involving
such documents as Form W- 2 (Wage and Tax Statement) and Publication 596
(Earned Income Credit).

IRS data for January through April, 2000, also indicated that taxpayers had
an easier time accessing the toll- free forms- ordering telephone line than
they did accessing the three customer service- related telephone lines
previously discussed. The data show that of 5.3 million call attempts to the
forms- ordering line, 4.0 million were answered- a 75- percent level of
service. 27 The 5.3 million call attempts represented a significant decrease
from the 7. 0 million call attempts during the same 4 months in 1999. The
decrease in call attempts, like the decrease in orders filled shown in table
5, could indicate that more taxpayers are using other sources, such as IRS'
Web site, to obtain needed forms and publications.

On a related matter, a recent IRS study found that when taxpayers called the
toll- free forms- ordering telephone number, they were not told how long it
could take to receive the form or publication until after the order was
placed. The study concluded that this procedure could cause wasted IRS
effort and increased taxpayer burden if taxpayers, after placing their order
on the telephone and being told the delivery time, decided to go to a walk-
in site to get the material rather than wait for the material to be sent by
mail. The study recommended that IRS rearrange its forms telephone menu and
advise its assistors to tell taxpayers at the beginning of the call how long
it generally takes to receive IRS forms ordered over the telephone. Doing so
would allow taxpayers to terminate the call immediately if the wait time is
unacceptable to meet their needs. When we asked whether they had implemented
this recommendation, cognizant IRS officials said that they had not. They
explained that providing the information at the beginning of the call could
be very awkward because assistors do not know (1) what the call is about and
(2) what the taxpayer

27 This level of service was slightly below the 78- percent level of service
IRS reported for January through April, 1999.

Page 25 GAO- 01- 158 IRS' 2000 Filing Season

is ordering. The officials stated that, depending on the product and time of
the year, the order time may change (e. g., due to products not being
available or being on backorder).

However, between April 1 and 15, IRS officials did institute two automated
messages on the forms- ordering line that were to come on when a caller was
put on hold because all of the assistors were occupied. The messages stated
that it could take up to 10 days for the caller to receive his or her order,
and that the caller may want to ask the assistor for alternate ways of
obtaining forms. However, these messages were operational only when the
forms operators were on duty, which was 7 days a week, 12 hours a day. If a
taxpayer called the forms line during the other 12 hours, the call rolled
over to another telephone line, which did not have these messages.

During the past several filing seasons, IRS has undertaken several efforts
aimed at reducing noncompliance with the EIC eligibility requirements. 28
Generally speaking, those efforts involved (1) using IRS' math error
authority to deny EIC claims that were not accompanied by valid SSNs and (2)
conducting in- depth reviews of EIC claims that met certain criteria. In
2000, IRS continued these efforts and began a new effort directed at tax
return preparers. Although IRS identified and stopped hundreds of millions
of dollars in erroneous EIC claims in 2000, a recent IRS study indicated
that IRS might still be paying out billions of dollars in erroneous EIC
claims. However, because that study involved returns filed in 1998, it
predated many of IRS' more recent EIC compliance efforts. IRS has studies
under way and planned that should help determine the impact of those more
recent efforts on noncompliance.

As IRS processes individual tax returns, it looks for computational errors
made by taxpayers or their representatives in preparing the returns. When
IRS finds such errors, it can automatically adjust the return through the
use of math error authority. In 1996, Congress first authorized IRS to treat
invalid SSNs as math errors, similar to the way that it had historically

28 The term “noncompliance” includes erroneous EIC claims caused
by mistakes, negligence, or fraud. IRS Expanded Its

Efforts to Reduce EIC Noncompliance; the Overall Impact of Those Efforts Is
Unclear

IRS Continued to Deny Some Improper EIC Claims Through Math Error Authority

Page 26 GAO- 01- 158 IRS' 2000 Filing Season

handled computational mistakes. 29 IRS now has the authority to (1)
automatically disallow, through its math error program, any deductions and
credits, such as the EIC, associated with an invalid SSN and (2) make
appropriate adjustments to any refund that the taxpayer might be claiming.

According to IRS data as of June 30, 2000, IRS had denied about $321 million
in erroneous EIC claims through its math error authority. Although
significant, this amount represents a decrease from the $410 million stopped
as of the same point in time in 1999. In that regard, as shown in table 6,
although the number of EIC recipients in 2000 was about the same as in 1999,
the number of EIC- related math errors involving SSNs and the number of
other EIC- related math errors both declined by more than 20 percent. These
declines would seem to indicate that IRS' efforts have caused taxpayers and
practitioners to be more careful in preparing EIC claims.

Table 6: EIC Recipients and Math Errors During 1999 and 2000 EIC recipients
and math errors January through August 1999 January through August 2000

Percentage change

Number of EIC recipients 19,016,474 18,896,854 -0.6 EIC math errors
involving an invalid SSN 435,991 334,177 -23.4 Other EIC math errors a
1,444,824 1,058,469 -26.7

a Other EIC math errors include errors in computing earned income and
figuring the EIC. To be comparable with data for 1999, the number for 2000
excludes 37,331 errors in 2 categories that were not considered math errors
in 1999.

Source: IRS report entitled Monthly Operational Review of Earned Income
Credit.

Other types of EIC noncompliance are not as easy to identify as math errors.
These types can be detected only through an audit. In 2000, IRS continued to
target for in- depth review certain types of EIC claims, such as those
involving the use of a child's SSN on multiple returns for the same year,
that IRS had identified as the main sources of EIC noncompliance. Taxpayers
whose returns were identified for inclusion in one of these

29 In 1998, Congress further provided that a taxpayer would be considered to
have omitted a correct SSN if information provided by the taxpayer on the
return with respect to the individual whose SSN was provided differed from
information that the Secretary of the Treasury obtained from the Social
Security Administration. IRS Targeted Certain Types

of EIC Claims for In- Depth Review

Page 27 GAO- 01- 158 IRS' 2000 Filing Season

programs were to be audited to determine if their EIC claims were valid.
During the first 11 months of fiscal year 2000, according to IRS, it closed
about 218,000 of those audits and identified about $336 million in erroneous
claims.

For the 2000 filing season, IRS implemented an integrated EIC education and
compliance effort directed at tax return preparers. IRS decided to implement
this effort, known as the EIC Preparer Outreach Program, because IRS data
indicated that 62 percent of the returns with EIC claims were prepared by
paid preparers. This program focused on preparers who generated at least 100
tax returns claiming the EIC because, according to IRS, that universe of
preparers accounted for 75 percent of the EIC tax returns done by paid
preparers. Preparers were divided into five groups, with each group getting
a different type of visit from IRS, ranging from education to criminal
investigation. At the time we completed our audit work, not enough
information was available on the results of the program to assess its
overall effectiveness. Additional information on the EIC Preparer Outreach
Program is presented in appendix IV.

The previously discussed EIC- related efforts are part of a 5- year
initiative for which Congress has appropriated about $140 million a year
since fiscal 1998. That initiative was begun after IRS, in April 1997,
reported the results of its tax year 1994 EIC compliance study. 30 The study
showed that of the $17.2 billion in EIC claimed during the study period, 26
percent, or about $4.4 billion, was overclaimed.

In September 2000, IRS published the results of another EIC compliance study
involving tax year 1997 returns. 31 That study showed that of the estimated
$30. 3 billion in EIC claims made by taxpayers who filed returns in 1998 for
tax year 1997, an estimated $9.3 billion (30.6 percent) was overclaimed. 32
After deducting about $1.5 billion in overclaims that IRS estimated it would
recover as a result of its enforcement programs, such as audits of tax
returns and corrections of math errors, IRS estimated that

30 Study of [EIC] Filers for Tax Year 1994, IRS, April 1997. 31 Compliance
Estimates for Earned Income Tax Credit Claimed on 1997 Returns, IRS, Sept.
2000. 32 Percentage does not compute due to rounding. IRS Initiated an EIC

Education and Compliance Effort Directed at Preparers

Recent IRS Study Indicates That IRS Might Be Allowing Billions of Dollars in
Erroneous EIC Claims

Page 28 GAO- 01- 158 IRS' 2000 Filing Season

it paid out about $7.8 billion in overclaims (25.6 percent of the total
amount of EIC claimed). 33 According to IRS, these results are not
comparable to the results of the tax year 1994 study because of (1) various
legislative changes since 1994 that affected eligibility for the credit, the
credit amounts, and IRS' administration of the credit and (2) methodological
changes to the study design.

Because IRS had not yet fully implemented many of the efforts that it
undertook as part of the EIC compliance initiative, the results of the tax
year 1997 study do not reflect the full impact of those efforts. In that
regard, IRS is doing a study of tax year 1999 returns and plans to study tax
year 2001 returns.

Going into the 2000 filing season, we had two predominant questions: how
would IRS' tax processing systems function given the challenges associated
with the Year 2000, and would IRS be able to improve its tollfree telephone
service in light of the performance problems experienced in 1999. Except for
a few relatively minor glitches, which were not unexpected given the
enormity of IRS' processing task, the processing systems worked well. On the
other hand, although taxpayers were better able to reach IRS over the
telephone compared to 1999, IRS' performance was still well below the level
achieved in 1998. Our forthcoming reports on IRS' toll- free telephone
service will contain recommendations directed at helping IRS improve its
performance.

In addition to telephone service, IRS provides other forms of assistance
that are used by tens of millions of taxpayers. While our review identified
several positive aspects with respect to IRS' monitoring of those assistance
efforts (such as development of a quality review program for walk- in sites
and various positive performance indicators related to IRS' Web site), we
also identified several opportunities for improvement. In some respects,
such as with the volunteer assistance programs and the assistance provided
by IRS' walk- in sites and area distribution centers, the opportunities
centered around performance measures. In those areas, unlike the situation
with respect to IRS' telephone service, it was not easy to assess IRS'
performance because either IRS did not have good measures

33 According to IRS, the range of sampling uncertainty around the 25. 6-
percent estimate is plus or minus 2.3 percentage points. Conclusions

Page 29 GAO- 01- 158 IRS' 2000 Filing Season

or there were problems with the data behind the measures. Management needs
good measures backed by reliable data if it is to draw meaningful
conclusions about its performance and make sound decisions about any need
for change. Other improvement opportunities we identified centered around
management oversight- the kind of oversight that would enhance the level of
service provided by better ensuring that (1) training materials and computer
equipment were delivered to the volunteer assistance sites on time and in
working condition and (2) data being entered on the Web site by various
offices within IRS are current and consistent.

We recommend that the Commissioner of Internal Revenue direct the
appropriate officials to do the following:

? Enhance the usefulness of walk- in site wait- time data by providing a
standard format for field offices to use in reporting that information to
the National Office and specifying the percentage of time that walk- in
sites are to meet established wait- time goals.

? In collaboration with IRS' partners in providing volunteer assistance,
develop performance measures for volunteer assistance sites that can be used
to ensure that taxpayers are receiving an adequate level of service.

? Identify the underlying causes for (1) untimely delivery of an adequate
supply of materials to volunteer assistance sites and (2) inadequate
district review of site operations, and take action to address those
underlying causes.

? To better ensure that area distribution centers provide timely service in
filling orders for forms and publications, revise the order- filling
timeliness measure so that (1) time is tracked from the day the order is
received and (2) tracking does not end until the entire order is filled,
even if backorders are involved.

? To better ensure that IRS' Web site contains accurate and useful
information, (1) assign clear responsibility in a central location for
identifying and correcting outdated and inconsistent data and (2) develop
minimum requirements for information to be included on the state pages in
the “Around the Nation” section of the site. Regarding the
latter, consider including information on the location of walk- in sites and
their hours of operation.

We requested comments on a draft of this report from IRS. We obtained
written comments in a December 8, 2000, letter from the Commissioner of
Internal Revenue (see app. V). In his letter, the Commissioner said that (1)
Recommendations for

Executive Action Agency Comments and Our Evaluation

Page 30 GAO- 01- 158 IRS' 2000 Filing Season

our report provided a fair and balanced assessment of IRS' efforts to
deliver a filing season that was relatively error- free while providing
taxpayers with top quality service and (2) IRS would make every effort to
resolve the issues noted in our report. While agreeing generally with our
recommendations, the Commissioner disagreed with parts of two
recommendations (although, in one case, IRS' plans are consistent with our
recommendation) and provided additional perspective that led to a rewording
of one recommendation. The Commissioner also expressed some concern about
one aspect of our assessment of IRS' telephone service.

The Commissioner agreed that IRS should provide a standard format for field
offices to use in reporting wait- time data for walk- in sites. However, he
did not agree that IRS should specify the percentage of time that walkin
sites are to meet established wait- time goals because doing so might
pressure IRS staff to serve taxpayers too quickly and, thus, negatively
affect service quality. We believe that just measuring average wait time can
mask a circumstance in which many taxpayers are waiting more than the length
of time specified in IRS' goal (i. e., 30 minutes for return preparation and
15 minutes for all other services) even though the average wait time is
below IRS' goal. Concern about staff working too fast and thus providing
poor quality service should be offset by the influence of other measures (i.
e., quality and customer satisfaction) on employee behavior.

The Commissioner agreed that goals and measures are needed for volunteer
sites and noted that one aspect of their performance- quality- is being
measured. We revised this report to make that clear. The Commissioner said
that IRS will discuss with its largest partner in providing volunteer
assistance the possibility of developing a timeliness measure. We believe
that any such discussion should also include a measure of customer
satisfaction. The Commissioner cautioned that IRS cannot require that its
partner adopt any measure. We recognize that collaboration is required and
revised our recommendation accordingly.

The Commissioner agreed with the need to improve the process of ordering and
delivering supplies and materials to volunteer assistance sites and said
that actions have been taken to address that issue. The Commissioner did not
comment on our recommendation that IRS identify the underlying causes of
inadequate district review of site operations and take necessary corrective
action.

Page 31 GAO- 01- 158 IRS' 2000 Filing Season

The Commissioner agreed that area distribution centers should track orders
for forms and publications from the day an order is received, but he did not
agree that tracking should continue until all backorders associated with an
order have been shipped. However, the tracking plans described by the
Commissioner include plans to measure overall elapsed time to fill an order,
including associated backorders. That is fully consistent with our
recommendation.

The Commissioner agreed with our recommendation regarding IRS' Web site and
said that steps have already been taken to assign clear responsibility for
ensuring accurate, useful, and timely information.

The Commissioner also commented on our discussion of IRS' performance in
providing telephone service. While agreeing that IRS can improve its
delivery of telephone service, the Commissioner did not believe that we
should compare IRS' performance to 1998 because IRS had significantly
changed its telephone service operating environment after 1998. We agree,
and have acknowledged in this report, that there were major changes after
1998, but we do not agree that those changes make it inappropriate to
compare IRS' performance in 1998 to its performance in 1999 and 2000. To the
contrary, we believe that such a comparison is essential. The changes made
after 1998 were intended to improve IRS' telephone service. The only way to
tell if service improved is to compare performance levels after the change
(1999 and 2000) with levels before the change (1998).

We are sending copies of this report to Senator William V. Roth, Jr.,
Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member, Senate
Committee on Finance; Representative Bill Archer, Chairman, and
Representative Charles B. Rangel, Ranking Minority Member, House Committee
on Ways and Means; and Representative William J. Coyne, Ranking Minority
Member of this Subcommittee. We are also sending copies to the Honorable
Lawrence H. Summers, Secretary of the Treasury; the Honorable Charles O.
Rossotti, Commissioner of Internal Revenue; the Honorable Jacob J. Lew,
Director, Office of Management and Budget; and other interested parties. We
will make copies available to others on request.

Page 32 GAO- 01- 158 IRS' 2000 Filing Season

This report was prepared under the direction of David J. Attianese,
Assistant Director. Other major contributors are acknowledged in appendix
VI. If you have any questions about this report, contact me or Mr. Attianese
on (202) 512- 9110.

Sincerely yours, James R. White Director, Tax Issues

Page 33 GAO- 01- 158 IRS' 2000 Filing Season

Appendix I: Description of Processing and Customer Service Performance
Indicators

Page 34 GAO- 01- 158 IRS' 2000 Filing Season

This appendix contains descriptions of the various performance indicators
listed in tables 1 and 3.

The percentage of individual income tax refunds that are free of any
Internal Revenue Service (IRS)- caused errors in the name and address field
or in the refund amount. The percentage is based on a sample of individual
income tax returns filed on paper.

The percentage of other- than- full- paid, individual paper returns that
Code and Edit staff process accurately. Other- than- full- paid returns
involve either a refund or an unpaid liability and account for most of the
paper returns processed.

The percentage of other- than- full- paid, individual paper returns that are
processed without transcription errors.

The percentage of orders that are processed accurately determined by
randomly checking selected taxpayer orders, monitoring telephone calls from
taxpayers, and reviewing the transcription of written requests from
taxpayers.

Determined through surveys of a random sample of taxpayers who call IRS'
toll- free telephone numbers and choose to participate.

Determined through surveys of a sample of taxpayers who visit IRS' walkin
sites and choose to participate.

Calculated by dividing the number of calls answered by the total call
attempts. Answered calls include calls to a voice messaging system that were
subsequently returned by IRS. Total call attempts is the sum of calls
answered, calls abandoned by the caller before receiving assistance, and
calls that receive a busy signal. Appendix I: Description of Processing and

Customer Service Performance Indicators Accuracy of Individual Income Tax
Refunds on Paper Returns

Accuracy of Individual Income Tax Returns Processed by Code and Edit Staff

Accuracy of Individual Income Tax Returns Processed by Data Transcribers

Accuracy With Which Forms Distribution Centers Process Taxpayer Orders

Customer Satisfaction With Toll- Free Telephone Service

Customer Satisfaction With Walk- In Service

Level of Service Provided by Toll- Free Taxpayer Service Telephone System

Appendix I: Description of Processing and Customer Service Performance
Indicators

Page 35 GAO- 01- 158 IRS' 2000 Filing Season

The percentage of notices reviewed that are correct. The notice accuracy
indicator is based on a sample of returns processing notices to be sent to
individual and business taxpayers. Among other things, IRS uses returns
processing notices to advise taxpayers of missing schedules or forms,
missing Social Security numbers (SSN), or refunds being delayed. IRS
reviewers compare the printed notice to various data, including information
in the taxpayer's account and on the taxpayer's tax return. IRS told us that
the results for individual and business taxpayers could not be separated.

The number of electronically filed individual income tax returns as a
percentage of all individual income tax returns filed.

The percentage of calls answered accurately determined by monitoring a
sample of telephone calls.

The percentage of refunds on electronically filed returns that are processed
within 21 days. The percentage is based on a sample of electronically filed
returns, and the days are counted from the date the return was received to
the date the refund was issued.

The percentage of refunds on paper individual income tax returns that are
processed within 40 days. The percentage is based on a sample of paper
returns, and the days are counted from the signature date on the return to 1
day after the issuance of the refund. Notice Accuracy

Percentage of Individual Income Tax Returns Filed Electronically

Tax Law Accuracy Rate for Taxpayer Inquiries (TollFree)

Timeliness of Refunds for Individual Income Tax Returns Filed Electronically

Timeliness of Refunds for Individual Income Tax Returns Filed on Paper

Appendix II: Several Factors Contributed to the Increase in Electronic
Filing

Page 36 GAO- 01- 158 IRS' 2000 Filing Season

In discussing the increase in electronic filing in 2000 compared to 1999,
IRS officials cited several contributing factors, in addition to the belief
that taxpayers are becoming more familiar and comfortable with computer
technology and electronic filing.

? The number of electronic return originators (ERO) increased from about
90,000 in 1999 to about 108,000 in 2000. 1 Also, some EROs offered free
electronic filing to any taxpayer, while others offered free electronic
filing to taxpayers who met certain criteria.

? IRS expanded its electronic filing marketing efforts by allocating $9
million in 2000 compared to $7.8 million in 1999. As part of this expansion,
IRS launched an effort to strengthen the “E- file” brand name by
expending over $5 million on promotions, such as television and radio
commercials; magazine ads; Internet banners; video productions; and
billboards.

? IRS continued to enter into new partnerships with private sector companies
to broaden the electronic services accessible through IRS' Web site. As part
of these arrangements, IRS placed hyper- links from its Web site to the
partners' Web sites, and partners offered services such as free electronic
filing and free tax preparation software.

? IRS added five forms and schedules to the list of documents that can be
filed electronically. The five forms and schedules included Schedule J (Farm
Income Averaging) and Form 8586 (Low Income Housing Credit). 2

? IRS expanded the alternative signature and payment initiatives that it had
begun in 1999. Further discussion of these initiatives follows.

One frequently cited barrier to the greater use of electronic filing is that
it has not been a paperless process. In that regard, electronic filers,
other than those who used TeleFile, have had to submit a paper signature
document (Form 8453) along with copies of their Wage and Tax Statements
(Form W- 2). 3 Also, taxpayers who filed electronically

1 As defined by IRS, EROs “originate the electronic submission of
income tax returns to the IRS.” Generally, EROs are tax return
preparers. 2 IRS plans to add 23 forms and schedules to the list for 2001
and add another 5 forms and schedules for 2002. According to an IRS
official, with the addition of those 28 forms and schedules, 99 percent of
all taxpayers should be able to file electronically in 2002.

3 Instead of submitting their W- 2s, TeleFile users must enter certain
information from each of their W- 2s via the telephone. In lieu of a
signature document, TeleFile users must make the following declaration over
the telephone: “Under penalties of perjury, I declare that to the best
of my knowledge and belief, the return information I provided is true and
correct and includes all amounts and sources of income I received during the
tax year.” Appendix II: Several Factors Contributed to

the Increase in Electronic Filing Alternative Signature and Payment
Initiatives

Appendix II: Several Factors Contributed to the Increase in Electronic
Filing

Page 37 GAO- 01- 158 IRS' 2000 Filing Season

(including those who used TeleFile) and had a balance due had to mail a
check and payment voucher to IRS. In 1999, IRS began various alternative
signature and payment initiatives that were aimed at making electronic
filing paperless and, therefore, more attractive to taxpayers and tax return
preparers. IRS expanded those initiatives in 2000.

Two initiatives- the Personal Identification Number (PIN) and E- File
Customer Number (ECN) programs- enabled participating taxpayers to use
electronic signatures and waived the need for them to submit Forms 8453 and
W- 2.

The PIN Program allows taxpayers who file returns through a participating
ERO to use a self- selected PIN instead of completing a Form 8453. IRS, in
2000, expanded the program by increasing the number of EROs selected to
participate from about 8,100 in 1999 to 18,000 in 2000. 4 As of October 4,
2000, about 5.4 million taxpayers had used this option in comparison to
about 500,000 in 1999. According to IRS, starting in 2001, all EROs will be
able to file electronic returns using a self- selected PIN. Also starting in
2001, both spouses will not have to be present when filing an electronic
joint return through a preparer using a PIN because IRS has developed an
unavailable spouse signature authorization worksheet. As noted in our report
on the 1999 tax filing season, 5 a representative of the largest national
tax return preparation company had mentioned this as one of the changes he
would like to see made to the PIN Program. 6

The ECN Program offered taxpayers who used a computer to prepare their tax
returns the opportunity to file on- line and use an ECN instead of
completing a Form 8453. In 2000, IRS expanded the ECN Program by increasing
the number of ECNs mailed to taxpayers from about 8 million in 1999 to about
12 million in 2000. As of October 4, 2000, about 1. 4 million taxpayers had
used this option in comparison to about 660,000 in 1999.

4 Although about 8,100 EROs were selected to participate in the PIN Program
in 1999, only about 2,500 submitted returns with a PIN. According to IRS, of
the about 18, 000 EROs selected to participate in 2000, about 8, 900
submitted returns with a PIN.

5 GAO/ GGD- 00- 37. 6 Another change that the representative wanted to see
made to the PIN Program was elimination of the authentication worksheet,
which IRS was requiring preparers to keep on file in case there was any
dispute about the return's authenticity. According to IRS, that worksheet
will no longer be required. Alternative Signature

Initiatives

Appendix II: Several Factors Contributed to the Increase in Electronic
Filing

Page 38 GAO- 01- 158 IRS' 2000 Filing Season

IRS' District Office of Research and Analysis surveyed taxpayers who used
the ECN in 1999. Of the respondents, 54 percent said that the ECN made them
more likely to file on- line and 60 percent said that the ECN would make
them more likely to file electronically in future years. According to IRS,
the ECN Program is being terminated. Instead, starting in 2001, online
filers will be able to use a self- selected PIN just like EROs.

An Electronic Tax Administration official told us that IRS believes that
more taxpayers took advantage of the PIN and ECN programs during the 2000
filing season because (1) practitioners and software companies did a better
job of marketing the programs; (2) software companies involved in the PIN
Program increased from 3 to 10; (3) 25 new software packages were available,
and 23 supported the ECN Program; and (4) the postcard alerting taxpayers
about the ECN Program was redesigned.

In 1999, for the first time, many taxpayers who electronically filed balance
due returns could pay their balance due either by credit card or by direct
debit from a checking or saving account. On- line filers who used certain
software packages were able to indicate on- line when filing their returns
that they wanted to pay any balance due by credit card. Taxpayers who used
traditional electronic filing or TeleFile could charge their balance due by
credit card with a toll- free telephone call to private companies that
processed the credit card payments. IRS expanded the credit card payment
option for the 2000 filing season by (1) promoting its use to paper filers
and (2) expanding its use to the payment of estimated taxes and the payment
of taxes accompanying applications for extensions to file.

Taxpayers filing electronic balance due returns could also pay their balance
due by direct debit to a checking or saving account through an automated
clearinghouse. IRS expanded the direct debit option for the 2000 filing
season by making it available to all electronic filers. This option
previously had not been available to TeleFile users. The direct debit is
only paperless for on- line filers who participated in the ECN Program.
Those filers used the ECN as their signature and were to indicate via an on-
line prompt that they wanted to use the direct debit option. Other on- line
filers and other electronic filers who chose the direct debit option had to
submit a Form 8453, which contains a disclosure statement that requires the
taxpayer's signature authorizing the direct debit. Alternative Payment

Initiatives

Appendix II: Several Factors Contributed to the Increase in Electronic
Filing

Page 39 GAO- 01- 158 IRS' 2000 Filing Season

According to IRS data, as of September 30, 2000:

? The number of credit card payments had increased to about 218,000 compared
to about 53,000 in 1999. At least 63,000 of the 218,000 payments were
associated with individual income tax returns that were filed
electronically.

? The number of direct debit payments had increased to about 237,000
compared to about 76,000 in 1999. Of the 237,000, about 36,000 were TeleFile
users.

IRS informed us that virtually no problems were encountered in processing
credit card and direct debit payments in 2000.

Although we saw no data with which to determine a direct cause/ effect
relationship, it appears that the availability of electronic payment options
led to the electronic filing of more balance due income tax returns in 2000.
In that regard, the Electronic Tax Administration Advisory Committee
reported that about 2.3 million balance due returns were filed
electronically in 2000- about 51 percent more than in 1999. 7

7 Annual Report to Congress, Electronic Tax Administration Advisory
Committee, June 30, 2000.

Appendix III: Changes Made by IRS to Reduce Taxpayer Errors and Enhance
Processing

Page 40 GAO- 01- 158 IRS' 2000 Filing Season

IRS made several changes for the 2000 filing season in an attempt to reduce
the number of taxpayer errors and enhance its processing efforts. Of
particular note, IRS simplified the Child Tax Credit worksheet, revised the
criteria for filing Schedule D (Capital Gains and Losses), began using dual
mailing addresses for taxpayers to use in sending their returns to IRS, and
began verifying secondary SSN.

As we reported last year, the Child Tax Credit caused processing problems
for IRS during the 1999 filing season because many taxpayers did not claim
the credit even though they checked a box on the return indicating that one
or more of their dependents was eligible for the credit. 1 IRS data indicate
that taxpayers and tax return preparers had fewer problems with the Child
Tax Credit in 2000. As of June 2, 2000, according to IRS, the number of
Child Tax Credit errors by taxpayers and preparers was 37 percent lower than
at the same time in 1999. This decrease is even more significant considering
that, according to IRS' Statistics of Income Division, more taxpayers
claimed the Child Tax Credit in 2000 than in 1999.

The fewer errors in 2000 can be attributed, at least in part, to changes IRS
made to the Child Tax Credit worksheet, which, in our opinion, reduced the
chance for error. Before the revision, taxpayers were required to complete
an 11- line worksheet that incorporated the criteria for eligibility along
with the calculations for the credit. IRS simplified the worksheet by
presenting the criteria in the form of questions to which the taxpayer was
to answer “yes” or “no.” If taxpayers plainly met
the criteria, they were directed to complete a simple five- line worksheet
to calculate the credit. Taxpayers who did not plainly meet the criteria
were directed to use a separate publication to determine if they were
entitled to any part of the credit. Our review of the revision and the
conditions that require use of the separate publication indicated that most
taxpayers would have been able to use the simple five- line worksheet and
avoid the publication.

1 GAO/ GGD- 00- 37. Appendix III: Changes Made by IRS to

Reduce Taxpayer Errors and Enhance Processing

Child Tax Credit Worksheet Simplified

Appendix III: Changes Made by IRS to Reduce Taxpayer Errors and Enhance
Processing

Page 41 GAO- 01- 158 IRS' 2000 Filing Season

As we discussed in our report on the 1998 filing season, IRS' implementation
of a legislative change relating to capital gains led to additional burdens
for IRS and taxpayers. 2 In 1998, if Schedule D, which is used to report
capital gains, was missing from a return, IRS would stop processing the
return and write the taxpayer asking for a Schedule D. For the 1999 filing
season, IRS changed that procedure to correspond with the taxpayer only if
the capital gain reported on the return was over a certain amount. For the
2000 filing season, IRS raised that amount and dropped the requirement for a
Schedule D if the only capital gain was from a mutual fund distribution.
Consistent with those changes, IRS data indicate that (1) about 17 percent
of the individual income tax returns that were received as of May 5, 2000,
included a Schedule D compared to about 21 percent at the same point in time
in 1999 and (2) as of June 2, 2000, the number of error notices related to
problems with Schedule D had decreased 7.7 percent compared to 1999.

When tax returns come into a service center, it is important that IRS be
able to quickly distinguish those that include remittances from those that
do not. IRS gives priority processing attention to returns with remittances
so that the money can be quickly deposited to the U. S. Treasury. The
mailsorting equipment IRS uses to identify and segregate mail containing
remittances relies on a magnetic ink detection system to determine if there
is a check in the envelope. However, because laser computer printers use
magnetic ink, the equipment often misreads that print as indicating the
presence of a check. According to a report prepared by IRS' Statistics of
Income Division, this problem caused many returns to be misidentified as
containing remittances. This misidentification causes an excessive amount of
nonremittance work to receive priority processing attention, which,
according to IRS, ultimately delays monetary deposits to the Treasury.

For the 2000 filing season, in an effort to better identify returns with
remittances, IRS tested the use of dual mailing addresses for taxpayers to
use in sending their Form 1040 return to IRS (persons using Forms 1040A and
1040EZ still used only one address). IRS' test involved the use of one
address for returns claiming a refund and another address for returns not
claiming a refund. An IRS sample of returns at 2 of its 10 service centers

2 GAO/ GGD- 99- 21. Criteria for Filing

Schedule D Revised Dual Mailing Addresses Used to Better Identify
Remittances

Appendix III: Changes Made by IRS to Reduce Taxpayer Errors and Enhance
Processing

Page 42 GAO- 01- 158 IRS' 2000 Filing Season

showed that taxpayers used the correct address (thus correctly identifying
their return as a refund or no refund return) 82 percent of the time.

Another IRS effort to enhance its processing efforts for the 2000 filing
season involved the systematic verification of secondary SSNs. As part of
that effort, IRS sent notices to taxpayers whose secondary SSNs were invalid
and who met other criteria. 3 Before the 2000 filing season, IRS had focused
its SSN verification efforts on primary SSNs and the SSNs of dependents and
EIC- qualifying children.

As of June 2, 2000, IRS had issued about 36,000 notices related to invalid
secondary SSNs. By contrast, about 1.6 million notices were generated
relating to invalid dependent SSNs, and about 152,000 notices were generated
relating to invalid primary SSNs.

3 IRS considers an SSN invalid if it is missing from the return or if the
SSN and associated name on the return do not match data in the Social
Security Administration's records. Secondary SSNs

Verified

Appendix IV: The EIC Preparer Outreach Program

Page 43 GAO- 01- 158 IRS' 2000 Filing Season

For the 2000 filing season, IRS implemented the Earned Income Credit (EIC)
Preparer Outreach Program- an integrated education and enforcement effort
whose goals are to (1) educate EIC preparers, (2) reduce EIC errors, and (3)
lower EIC overclaims.

IRS divided preparers into five groups, with each group getting a different
type of visit from IRS, ranging from education to criminal investigation.
The type of visit that each preparer received was based on the preparer's
filing history.

? The first group consisted of about 9,000 preparers. Visits to those
preparers were to have an education and outreach focus. During these visits,
IRS employees were to, among other things, give preparers the EIC
Practitioner's Kit.

? The second group consisted of about 880 preparers who were to receive a
limited due diligence review. In conducting these reviews, revenue agents
were to look at 10 returns and associated documents done by each preparer to
determine if the preparer complied with the due diligence requirements
specified in section 6695( g) of the Internal Revenue Code. 1 The revenue
agents could recommend a $100 penalty for each failure to comply with the
due diligence requirements.

? The third group consisted of about 325 preparers who were to receive a
more comprehensive due diligence review. Revenue agents were to review up to
100 returns and associated documents in increments of 25 returns. According
to IRS guidelines, an agent's decision regarding whether to review each
succeeding increment was to be based on the results of the agent's review of
the previous increment. Once again, the agents could recommend a $100
penalty for each failure to comply with the due diligence requirements.

? The fourth group consisted of 118 preparers who were treated as program
action cases. A program action case consists of an examination of returns
done by the preparer when information indicates a pattern of noncompliance
with preparer provisions of the Internal Revenue Code. According to IRS, a
program action case can result in a variety of penalties being asserted
against both the preparers and their clients.

1 To demonstrate due diligence, preparers, among other things, must complete
an EIC worksheet or the equivalent and “must not know or have reason
to know that any information used by the preparer in determining the
taxpayer's eligibility for the [EIC] is incorrect.” Appendix IV: The
EIC Preparer Outreach

Program

Appendix IV: The EIC Preparer Outreach Program

Page 44 GAO- 01- 158 IRS' 2000 Filing Season

? The fifth group consisted of 75 preparers who were to be criminally
investigated by IRS' Criminal Investigation Division.

IRS completed 7,152 education and outreach visits, 751 limited due diligence
visits, and 264 comprehensive due diligence visits. The number of completed
visits was less than the number planned for several reasons. For example,
some preparers in the first group opted out of their education and outreach
visits, and other preparers had either gone out of business or could not be
located. 2 As of June 27, 2000, IRS had started 118 program action cases and
had not begun any criminal investigations.

In late January and early February 2000, The Gallup Organization conducted a
telephone survey of 401 preparers who had received education and outreach
visits. The survey showed that 83 percent of the respondents were quite
satisfied with the visits. According to the survey, preparers most liked (1)
the thorough explanations of the EIC requirements, (2) the friendly and
courteous IRS representatives, and (3) the ability to discuss concerns with
IRS representatives.

According to IRS, revenue agents proposed penalties totaling about $435,000
for 143 of the 1,015 preparers who received either a limited or
comprehensive due diligence visit. As of June 27, 2000, most of the proposed
penalties had been assessed, but about $92,000 was still under appeal

2 The education and outreach visits to preparers in the first group were
optional on the part of the preparers. IRS visits or actions for the other
four groups were mandatory.

Appendix V: Comments From the Internal Revenue Service

Page 45 GAO- 01- 158 IRS' 2000 Filing Season

Appendix V: Comments From the Internal Revenue Service

Appendix V: Comments From the Internal Revenue Service

Page 46 GAO- 01- 158 IRS' 2000 Filing Season

Appendix V: Comments From the Internal Revenue Service

Page 47 GAO- 01- 158 IRS' 2000 Filing Season

Appendix V: Comments From the Internal Revenue Service

Page 48 GAO- 01- 158 IRS' 2000 Filing Season

Appendix V: Comments From the Internal Revenue Service

Page 49 GAO- 01- 158 IRS' 2000 Filing Season

Appendix V: Comments From the Internal Revenue Service

Page 50 GAO- 01- 158 IRS' 2000 Filing Season

Appendix VI: GAO Contacts and Staff Acknowledgments

Page 51 GAO- 01- 158 IRS' 2000 Filing Season

James White (202) 512- 9110 David Attianese (202) 512- 9110

In addition to those named above, Jyoti Gupta, Doris Hynes, Ron Jones, John
Lesser, Joanna Stamatiades, and Bradley Terry made key contributions to this
report. Appendix VI: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

(268907)

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