    Tax Administration: IRS Improved Performance in the 2004 Filing
    Season, But Better Data on the Quality of Some Services Is Needed
    (15-NOV-04, GAO-05-67).

    Most taxpayers have their only contact with IRS during the filing
    season, with tens of millions filing their returns, getting
    refunds, and seeking assistance by calling or visiting IRS's
    offices or Web site. GAO was asked to assess IRS's performance in
    2004 relative to goals and prior years' performance as well as
    initiatives or other factors that significantly affected
    performance for the following areas: (1) the processing of paper
    and electronic returns, (2) telephone service, (3) walk-in
    service, and (4) Web site service.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-67
        ACCNO:   A13512
      TITLE:     Tax Administration: IRS Improved Performance in the 2004
    Filing Season, But Better Data on the Quality of Some Services Is
    Needed
         DATE:   11/15/2004
      SUBJECT:   Customer service
    	     Electronic forms
    	     Human resources training
    	     Human resources utilization
    	     Performance measures
    	     Tax administration
    	     Tax returns
    	     Taxpayers
    	     Telephone
    	     Web sites
    	     Data integrity

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    GAO-05-67

    United States Government Accountability Office

    GAO
       	Report to the Chairman, Subcommittee on Oversight, Committee on Ways and Means, House of Representatives

    November 2004

    TAX ADMINISTRATION

    IRS Improved Performance in the 2004 Filing Season, But Better Data on the Quality of Some Services Are Needed

                                           a

    GAO-05-67

    November 2004

    TAX ADMINISTRATION

    IRS Improved Performance in the 2004 Filing Season, But Better Data on the
    Quality of Some Services Are Needed

    What GAO Found

    During the 2004 filing season, IRS met many of its performance goals and
    continued a trend of improvement in recent years. However, IRS did not
    improve in all dimensions of its filing season services and lacks
    sufficient data to evaluate quality in others.

    IRS processed returns and issued refunds smoothly. The proportion of
    returns filed electronically is up to 47 percent. Despite this achievement
    and numerous initiatives to increase electronic filing, IRS does not
    expect to reach its long-term goal of having 80 percent of all individual
    tax returns filed electronically by 2007. A higher percentage of taxpayers
    was able to reach IRS assistors by telephone than last year and the
    accuracy rate for providing taxpayers with information about their
    accounts remained stable. However, the accuracy rate for answering tax law
    questions declined to 2001 levels. Consistent with IRS's strategy, the
    number of taxpayers visiting IRS walk-in sites declined, while the number
    having tax returns prepared at volunteer sites increased. Finally,
    although IRS continued to expand its Web site services, the site's feature
    for answering tax law questions raises some concerns.

    Despite the 2004 improvements, IRS has opportunities for further service
    improvements. For example, IRS has limited data with which to assess the
    quality of key services at its walk-in sites and sites staffed by
    volunteers. Although IRS has initiatives under way to measure quality at
    both types of sites, the initiatives have been delayed and important
    details have not yet been determined, which may undermine IRS's efforts to
    improve services in this area. In the meantime, some of IRS's quality data
    is likely to be biased. Until IRS fully implements its initiatives and
    gathers data on quality, it will have difficulty monitoring and improving
    performance at its walk-in sites and volunteer sites.

    IRS's Primary Activities During the 2004 Filing Season Returns processing
    Taxpayer assistance

    Paper returns 67 million Toll-free telephone calls 84 million

    Electronic returns 61 million Walk-in contacts 3.5 million

    Source: GAO analysis of IRS data.

    Note: Time periods covered are January 1 through September 17, 2004 for
    paper returns; January 16 through September 17, 2004 for electronic
    returns; January 1 through September 17, 2004 for refunds; January 1
    through July 10, 2004 for toll-free calls; December 28, 2003 through April
    24, 2004 for walk-in contacts; and January 1 through August 31, 2004 for
    Web site downloads.

                     United States Government Accountability Office

    Contents

    Letter

    Results in Brief
    Scope and Methodology
    Background
    IRS Has Generally Improved Its Performance Processing Tax

    Returns but Does Not Expect to Meet Its LongTerm Electronic Filing Goal Access to IRS's Telephone Assistors Improved but Tax Law Accuracy Declined Taxpayer Use of IRS Walkin Sites Continued to Decrease While Use of Volunteer Sites Increased; Quality Data Are Limited Use of IRS's Web Site Increased, But Concerns Exist About a

    Feature for Answering Tax Law Questions Conclusions Recommendations Agency Comments and Our Evaluation

    1 2 3 5

    7

    12

    17

    22 25 26 26

    Appendixes

    Appendix I:

    Appendix II:

    Appendix III: Appendix IV:

    Data on IRS's Processing Performance Relative to Fiscal Year 2001-2003
    Performance and Fiscal Year 2004 Goals

    IRS Spends Thousands of Staff Years on Filing Season Activities

    Comments from the Internal Revenue Service

    GAO Contacts and Staff Acknowledgments

    29

    31 34 44

    Tables Table 1:

    Table 2: Table 3: Table 4:

    Table 5: IRS Telephone Assistors Performance, 2001-2004 Filing Seasons 15 Use of IRS's Web site from 2001-2004 23 IRS's Processing Performance, 2001-2004 29 The Number of Staff Years Used in Key Processing Activities for Individual Income Tax Returns, Fiscal Years 1999-2003 32 Staff Years Directed to Answering Toll Free Calls Fiscal Year 2001-2003 32

                                        Contents

    Figures Figure 1:

    Figure 2: Figure 3:

    Figure 4:

    Figure 5: Figure 6:

    Figure 7: How IRS Typically Routes Taxpayers' Calls to TollFree Numbers 6 Percent of Tax Returns Filed Electronically 1996-2004 9 Reasons Taxpayers Called for Telephone Assistance During the 2004 Filing Season 13 How IRS Handled Calls for Telephone Assistance During the 2004 Filing Season 14 The Contact Recording Pilot Process 17 Assistance Provided by IRS Walkin and Volunteer Sites, 2001-2004 Filing Season (in millions) 18 Direct FullTimeEquivalents Used forReturnPreparation at IRS Walkin Sites, 20012004 Filing Seasons 33

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office

    Washington, D.C. 20548

    November 15, 2004

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

    Dear Mr. Chairman:

    Most taxpayers have their only contact with the IRS during the tax filing
    season1 making the agency's performance during this period a key indicator
    of how well IRS is serving the public and helping them fulfill their tax
    obligations. IRS's filing season is an enormous undertaking, requiring
    thousands of IRS staff years to process well over 100 million individual
    income tax returns, issue refunds, and respond to telephone calls and other
    requests for assistance. To the extent that IRS can improve filing season
    operations and provide services more efficiently, it could shift resources to
    other areas such as enforcement.

    Because of the importance of IRS's filing season activities to taxpayers and
    the Congress, you asked us to assess the 2004 tax filing season. Our
    objectives were to assess IRS's filing season performance, relative to this
    year's goals and prior years' performance, and any initiatives or factors that
    significantly affected performance. We did this for (1) the processing of
    individual tax returns filed on paper or electronically, (2) tollfree
    telephone service, (3) walkin and volunteer site service, and (4) IRS's
    Internet Web site. We testified on IRS's interim performance in a hearing
    held by your Subcommittee on Oversight, Committee on Ways and Means
    on March 30, 2004.2

    Our assessment is based on reported results and analyses of key IRS
    performance measures and data, observations of IRS's operations,
    interviews of IRS officials, information from representatives of the tax
    practitioner community, and analyses by the Treasury Inspector General
    for Tax Administration (TIGTA). For the purpose of this report, we found

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

    2 GAO, Internal Revenue Service: Assessment of Fiscal Year 2005 Budget
    Request and 2004 Filing Season Performance,
    GAO04560T (Washington, D.C.: Mar. 30, 2004).

    IRS's data to be sufficiently reliable for assessing IRS's 2004 filing season performance and for comparison to prior filing seasons. Further details on our scope and methodology are provided later in this report. We performed our work from January through September 2004 in accordance with generally accepted government auditing standards.

    Results in Brief
       	During the 2004 filing season, IRS met many of its performance goals and continued a trend of improvement in recent years. However, IRS did not improve in all dimensions of its filing season services and lacks sufficient data to evaluate quality in others.

    Processing: IRS nearly met or exceeded most of its 2004 goals for processing tax returns and issuing refunds. Performance has generally improved since 2001. Over 61 million returns or 47 percent of all individual income tax returns were electronically filed in 2004. Despite this achievement and numerous initiatives to increase electronic filing, IRS does not expect to meet its longterm goal of having 80 percent of all individual tax returns filed electronically by 2007.

    Telephone Service:
    Access to IRS assistors increased and the accuracy of IRS's response to account questions has remained stable since last year. However, the accuracy rate for responding to tax law questions declined for the second consecutive year and is at the same level as 2001.

    Walk-in
    Assistance: The number of taxpayers visiting IRS walkin sites continued to decline in the 2004 filing season, while the number receiving return preparation assistance at nonIRS sites staffed by volunteers increased, consistent with IRS's strategy to shift return preparation to those sites. Available, but limited, data raise questions about the quality of key services provided at both types of sites. In addition, some of the quality data IRS expects to have available in 2005 is likely to be biased. Initiatives under way to improve quality measurement have experienced delays, and important details have not yet been determined.

    Internet Web Site: IRS's Web site is generally easy to access and use. However, we still have some concerns about IRS's performance answering tax law questions submitted via the site.

    We are making recommendations to the Commissioner of Internal Revenue that IRS recognize and disclose the limitations of the performance data that will be collected at walkin sites in the 2005 filing season; take steps to

    ensure that its initiatives to improve data on the quality of services at walkin and volunteer sites are implemented in a timely manner; and recognize that decisions about the prominence and staffing to give its Web site feature for answering tax law questions are related. In commenting on a draft of this report (see app. III), IRS agreed with the recommendations about walkin and volunteer site initiatives. Additionally, IRS agreed with the intent of the other two recommendations, but disagreed with our assessment of the extent of the problems. However, without stronger evidence, such as statistically valid data, our concerns remain.

    Scope and Methodology

    Our assessment of IRS's 2004 filing season performance was based on analyses of IRS data and information obtained from sources outside IRS, interviews with IRS officials and private sector tax practitioners, observations of IRS operations, and, for the comparison to previous years, on our past filing season reports.

    More specifically, we

    o
       	reviewed and analyzed IRS reports, testimonies, budget submissions, other documents and data, including workload data and data from IRS's current suite of balanced performance measures, which we used to assess performance this year;

    o
       	interviewed IRS officials about current operations, performance relative to 2004 goals and prior filing seasons, and significant factors and initiatives that affected performance;

    o
       	interviewed representatives of large private and nonprofit organizations that prepare tax returns and trade organizations that represent both individual practitioners and tax preparation companies;

    o  reviewed related TIGTA reports and interviewed TIGTA officials;

    o
       	followed up on GAO recommendations made in prior filing season and related reports;

    o
       	tested for statistical differences between yearly changes for various IRS performance measures;

    o
       	analyzed information posted to IRS's Internet Web site based on GAO's knowledge of the type of information taxpayers look for, and assessed

    the ease of finding information, as well as the accuracy and currency of data on the site;

    o
       	reviewed information from companies that evaluated Internet performance and assessed various aspects of IRS's Web site; and

    o
       	reviewed staffing data for paper and electronic processing, telephone assistance, and walkin assistance.

    This report discusses filing season performance measures and data covering the quality, accessibility, and timeliness of IRS's services. We have previously reported that some of the performance measures IRS uses to assess aspects of its filing season performance had attributes of successful measures, including objectivity and reliability, although in some cases, the measures could be further refined.3 Since that report, IRS has made refinements in some measures. We also reviewed IRS documentation, interviewed IRS officials about computer systems and data limitations, and compared those results to GAO standards of data reliability.4 As a result, we determined that the IRS data we are reporting are sufficiently reliable for assessing IRS's filing season performance. Data limitations are discussed where appropriate.

    We conducted our work at IRS headquarters in Washington, D.C.; the Small Business/SelfEmployed Division headquarters in New Carrollton, Maryland; the Wage and Investment Division headquarters, the Joint Operations Center (which manages telephone service), and a telephone call site in Atlanta, Georgia; and walkin and volunteer locations in Georgia, Maryland, and Virginia. We selected these offices for a variety of reasons, including the location of key IRS managers, such as those responsible for telephone and walkin and volunteer services. We performed our work from January through October 2004 in accordance with generally accepted government auditing standards.

    3 GAO, Tax Administration: IRS Needs to Further Refine Its Tax Filing
    Season Performance Measures, GAO03143 (Washington, D.C.: Nov. 22, 2002).

    4 GAO, Assessing the Reliability of Computer-Processed
    Data, GAO0215G (Washington, D.C.: Sept. 1, 2002).

    Background
       	IRS's filing season is an enormous and critical undertaking that includes two key activities-returns processing and taxpayer assistance-and which consumes thousands of staff years annually. Processing of paper returns is labor intensive and errorprone. IRS employees manually transcribe paper tax return information into IRS's computer systems, which can introduce errors. Electronic filing allows taxpayers to receive refunds faster, and processing is less laborintensive and error prone than for paper returns. IRS does not have to transcribe electronic tax return information and builtin checks eliminate many errors that IRS has to deal with when processing paper tax returns, such as computational mistakes and incorrect social security numbers. The rate for this type of error on electronic tax returns was almost 4 percent compared to almost 25 percent on paper tax returns, as of July 9, 2004.

    To help taxpayers comply with their tax obligations, IRS provides various services at its call sites, walkin sites, and on its Web site. Figure 1 shows how tollfree telephone calls from taxpayers typically are routed through IRS's telephone system and answered by customer service representatives (CSRs) or by automated services.

    Figure 1: How IRS Typically Routes Taxpayers' Calls to Toll-Free Numbers

    Source: GAO analysis of IRS data and Art Explosion.

    At IRS's approximately 400 walkin sites taxpayers ask tax law questions, get account information, receive assistance with their accounts, and have returns prepared (if annual gross income is $35,000 or less). In addition, lowincome and elderly taxpayers get tax returns prepared at over 13,500 volunteer sites5 run by communitybased coalitions that partner with IRS. IRS awards grants, trains and certifies volunteers, and provides reference materials, computer software and, in some cases, computers to these volunteer organizations.

    IRS's Web site is important because it allows taxpayers to instantly download hundreds of tax forms and publications, access current information on tax issues and electronic filing, and ask IRS tax law and procedural questions.

    5 Most volunteer sites have limited days and hours of operation and are open primarily between January and April 15.

    Since passage of the IRS Restructuring and Reform Act of 19986 (RRA 98), IRS has been focused on improving filing season services. In 2001, IRS established a suite of balanced performance measures.7 The system emphasizes accountability for achieving specific results and reflects IRS's priorities, including providing quality service to each taxpayer in every interaction. As part of its strategic planning and budgetary processes, IRS establishes performance goals each fiscal year8 and uses them to hold managers and frontline staff more accountable for improving filing season performance.

    IRS Has Generally Improved Its Performance Processing Tax Returns but Does Not Expect to Meet Its LongTerm Electronic Filing Goal

    IRS processed individual income tax returns and issued refunds smoothly in 2004. IRS nearly met or exceeded many of its 2004 performance goals, with performance generally improving since 2001. However, despite continued growth this year and despite various initiatives to encourage electronic filing, IRS is not on track to achieve its longterm goal of having 80 percent of all individual tax returns filed electronically by 2007.

    As of September 17, 2004, IRS had processed about 128 million individual tax returns, including for 67 million returns filed on paper, with no significant disruptions and issued nearly 100 million refunds within specified tolerances.9 According to IRS data, IRS nearly met or exceeded seven out of its eight processing performance goals in 2004. Similarly, 2004 performance nearly met or exceeded 2003 performance for six of the seven comparable measures.10 Appendix 1 provides details. Furthermore, as Appendix 1 and the following examples show, IRS has generally improved its processing operations over a longer period.

    6 P.L. 105206, July 22, 1998.

    7 IRS's balanced measures system is consistent with the Government Performance and Results Act of 1993 (P.L. 10362), which was enacted to hold federal agencies accountable for achieving program results (See GAO03143).

    8 Although IRS establishes goals for its balanced measures on a fiscal year basis, our assessment of these measures was based on different times during the filing season, depending on the filing season activity being assessed.

    9 Time periods covered for paper returns and refunds were January 1 through September 17, 2004.

    10 IRS's measure for deposit timeliness for 2004 was not comparable to previous years because IRS changed the formula to not include weekends in calculating timeliness.

    o
       	The percent of notices with errors has declined since 2002 (for notices sent to taxpayers about possible simple mistakes on their returns). In 2002, 18.7 percent of the notices were issued with errors compared to 9.4 percent as of July 31, 2004 (the most current data available).

    o
       	The refund error rate, the percentage of refunds with IRScaused errors (e.g., incorrect name or Social Security number), has decreased from 9.8 percent in 2001 to 5.3 percent in 2003, to 4.9 percent as of July 31, 2004 (the most current data available).

    Tax practitioners, who last year prepared approximately 62 percent of all individual income tax returns, agreed that the processing of returns in the 2004 filing season has gone smoothly. Representatives from the National Association of Enrolled Agents, American Institute of Certified Public Accountants, and other tax related organizations had positive comments on IRS's 2004 filing season and processing. Similarly, TIGTA officials told us that IRS generally processed returns smoothly in 2004.

    IRS officials attributed this year's performance in part to their planning for tax law changes, such as the advance child tax credit and the increase in electronic filing.

    Electronic Filing Grew but Is Not on Track to Achieve LongTerm Goal

    The number of individual income tax returns that IRS received electronically continued to grow, and IRS exceeded its 2004 goals for the number and percentage of tax returns to be filed electronically. From January 16 through September 17, 2004, it had received an estimated 61.1 million individual tax returns electronically or 47 percent of all returns filed to date. Also, the growth rate of 15.8 percent is greater than IRS's projected growth rate of 13 percent for this year. Figure 2 shows that growth since 1996.

    Figure 2: Percent of Tax Returns Filed Electronically 1996-2004

    Percentage 100

    80

    60

    40

    20

    0 1996 1997 1998 1999 2000 2001 2002 2003 2004

    Source: GAO analysis of IRS data.

    According to IRS officials, the primary reason for the greater than expected growth rate is that five states mandated electronic filing of state tax returns prepared by qualified tax practitioners for 2004. According to these same officials, these mandates led to significantly more electronic filing of federal tax returns in these states because tax practitioners converted their entire practices to electronic filing. For example, for California and Michigan, the largest of the five states, the number of tax returns filed electronically increased from 4.7 million and 1.9 million in 2003 to 7.1 million and 2.6 million respectively as of May 2004.

    The current rate of growth of electronic filing, however, will not allow IRS to achieve its longterm electronic filing goal of 80 percent of all returns by 2007, provided by RRA 98. Assuming a continuation of the current growth rates of 15.8 percent for individual returns filed electronically and .23 percent for the total number of individual tax returns filed, IRS would receive 73 percent of individual tax returns electronically by 2007.

    However, neither IRS nor the Electronic Tax Administration Advisory Committee (ETAAC)11 expects IRS to maintain this year's growth rate. In fact, IRS is predicting declining growth rates of about 11.5 percent, 9.9 percent, and 8.1 percent in 2005, 2006 and 2007, respectively. In its June 30, 2003, report to Congress, ETAAC concurred with IRS's prediction of lower annual growth rates.

    IRS officials stated that achieving the 80 percent goal would require taxpayers and tax practitioners who prepared 39 million individual income tax returns12 on a computer but filed them on paper would instead have to file them electronically, or legislation would have to be proposed and passed that mandates electronic filing by tax practitioners.

    Electronic filing is important because, according to IRS, it costs less to process electronic tax returns than paper tax returns. IRS estimates it saves $2.15 on every individual tax return that is processed electronically. However, we cannot independently verify this estimate and its basis is unclear, because as we have reported, IRS does not have a cost accounting system to support preparation of such cost estimates.13 Electronic filing has allowed IRS to close paper processing centers, devote less staff to the processing of tax returns, and control processing costs by shifting resources from laborintensive paper return processing to other areas, such as compliance. For example, with the elimination of paper tax return processing at the Brookhaven Submission Processing Center, IRS used about 1,000 fewer staff years to process paper returns in 2003 than in 2002, and plans additional staffyear savings when paper tax returns processing at the Memphis Submission Processing Center is eliminated in 2005. (See app. 2 for more information on staff years).

    Because increasing electronic filing is so important, IRS officials do not want to reduce the 2007 goal, even though IRS projects that it is not

    11 Electronic Tax Administration Advisory Committee, Annual Report to
    Congress,
    (Washington, D.C., June 2003). RRA 98 mandated that the Secretary of the Treasury convene an electronic commerce advisory group to ensure that the Secretary receives input from the private sector on IRS's plan to increase electronic filing. ETAAC reports to Congress annually on IRS's progress towards meeting electronic filing goals.

    12 Data as of June 30, 2003, the latest available data.

    13 GAO, Financial Audit: IRS's Fiscal Year 2003 and 2002 Financial
    Statements, GAO04126 (Washington, D.C.: Nov. 13, 2003).

    achievable. Retaining this goal serves as a symbol of their determination to take actions to convert taxpayers to file electronically.

    IRS Has Taken Numerous Actions to Encourage More Electronic Filing

    Over the years, IRS has taken numerous actions to encourage electronic filing, including

    o
       	making electronic filing free to most taxpayers via the Free File Alliance Program,14 a program that began last year;

    o
       	surveying taxpayers and tax practitioners in response to a recommendation in our 2001 filing season report 15 to determine why 40 million tax returns were prepared on a computer but filed on paper;

    o
       	making over 99 percent of all individual tax forms suitable for electronic filing; and

    o
       	making the process totally paperless if a person uses a personal identification number to sign the tax return.

    For the 2004 filing season, IRS took the following actions to encourage taxpayers and practitioners-primarily those who prepared returns on a computer, but filed them on paper-to file electronically IRS. IRS

    o
       	improved the Free File Alliance Program (as of September 17, 2004, about 3.5 million individual tax returns have been filed electronically via the Free File Alliance, compared to 2.8 million for all of last year, a 26 percent increase);

    o
       	contacted about 12,200 tax practitioners who prepared business returns on computers, but filed electronically to advise them about the benefits of electronic filing;

    14 In 2003, IRS entered into a 3year agreement with the Free File Alliance, a consortium of tax preparation companies that provides free electronic filing to taxpayers who access any of the companies via a link on IRS's Web site. IRS is currently in the second year of the initiative, and 17 companies offered free filing via IRS's Web site.

    15 GAO, Tax Administration: Assessment of IRS' 2001 Tax Filing Season,
    GAO02144, (Washington, D.C.: Dec. 21, 2001).

    o
       	targeted the approximately 8 million individual taxpayers who filed their own paper returns prepared on a computer by mailing them a modified version of Publication 8160E that cites the advantages of electronic filing;

    o  spent $11.2 million marketing electronic filing; and

    o  made six more forms available for electronic filing.

    Other major electronic filing initiatives could lead to more individual electronically filed tax returns starting in 2005. However, IRS did not expect the following initiatives to dramatically increase electronic filing in 2004 because taxpayers and practitioners will need time to adjust their behavior.

    o
       	The modernized Efile program, which for the first time, allows electronic filing of corporate tax returns, could lead to more individual tax returns being filed electronically. According to IRS officials, some tax practitioners reported they would not file electronically until they could do so for both individual and corporate tax returns, saying it did not make business sense to file tax returns two different ways.

    o
       	The Eservices program, offered to tax practitioners who have filed at least 100 electronic tax returns, gives them the ability to conduct business, such as electronic account resolution and transcript delivery with IRS electronically 24 hours a day 7 days a week for services.

    Despite these initiatives, IRS does not expect to reach its 2007 goals for electronic filing. However, because of the potential for cost savings, we continue to see value in such initiatives.

    Access to IRS's IRS exceeded its 2004 telephone service goal for access to customer

    service representatives (CSRs) and has improved in this area since 2001.Telephone Assistors However, the accuracy of CSR answers to tax law questions declined. IRS Improved but Tax Law initiated two pilots in 2004 to help assess options for improving its Accuracy Declined telephone service.

    Access to Customer Service Representatives Continued to Improve; the Accuracy of Account Inquiries Was Stable; but the Accuracy of Tax Law Questions Declined

    IRS received 84 million calls on
    its tollfree telephone lines in 2004 through midJuly. Figure 3 shows that almost half
    of those calls were from callers trying to obtain information on
    the status of
    their tax refunds; the rest were primarily account or tax law questions.

    Figure 3: Reasons Taxpayers Called for Telephone Assistance During the
    2004 Filing Season

    Note: The "other" category includes, for example, special telephone
    numbers not available to the public, such as those for disaster relief,
    tax practitioners, and calls that were received on the automated services
    line that were abandoned. Data cover the period January 1, 2004 through
    July 10, 2004.

    Figure 4 shows how the calls were handled. IRS's automated service handled 30
    million calls and CSRs handled 24 million.16 The rest of the calls

    16 Of the 84 million calls, IRS had 173,000 busy signals-less than onehalf of 1 percent.
    In comparison, during
    the 2002 filing season, busy signals represented about 3.8 percent of
    calls.

    came in after business hours, were transferred, were disconnected, or the caller hung up before receiving service.

    Figure 4: How IRS Handled Calls for Telephone Assistance During the 2004
    Filing Season

    Source: GAO analysis of IRS data and Art Explosion.

    Note: Percentages do not add to 100 percent due to rounding. Data cover
    the period January 1, 2004 through July 10, 2004.

    As table 1 shows, compared to last year, access to CSRs continued to
    improve, the average time taxpayers waited for CSRs remained stable, and
    the accuracy of CSR responses to account questions remained stable, while
    the accuracy of CSR responses to tax law questions declined.

         Table 1: IRS Telephone Assistors Performance, 2001-2004 Filing Seasons

    Fiscal year 2001 2002 2003 2004 goals 2004

                                Accessibility measuresa

                       CSR level of service b 68% 71% 85% 86% 83%

    Average speed of answer c 334 274 168 170 199 seconds seconds seconds
    seconds seconds

                                   Accuracy measuresd

                Accounts customer accuracy  88.1%    90.5%   88.6%     89.0%
                                     ratee +/- 0.6  +/-0.4  +/- 0.4   +/-0.5  90%
                 Tax law customer accuracy  79.1%    84.9%   81.3%     79.5%
                                     ratee +/- 0.6  +/-0.5  +/- 0.7   +/-0.8  85%

    Source: GAO analysis of IRS data.

    a Based on actual counts from January through mid-July for 2001, 2002,
    2003, and 2004.

    b The percentage of callers who want to speak to a customer service
    representative (CSR) who get through and receive service.

    c Average number of seconds a taxpayer waits in queue for a CSR. Beginning
    in 2004, IRS expanded the services included in this measure. However, the
    calculation of the measure remained the same. Recomputed figures are shown
    here and are different than what we reported in the past (see GAO-04-84).
    Based on actual counts from January through mid-July for 2001, 2002, 2003,
    and 2004.

    d Based on representative samples and from January through June for 2001,
    2002, 2003, and 2004.

    e The percentage of calls in which CSRs provided accurate answers for the
    call type and took the appropriate follow-up resolution action, with a 90
    percent confidence interval.

    Unlike calls to CSRs, IRS does not have a quality measure
    for its automated telephone services. In our report on IRS's performance measures,17 we
    recommended that IRS develop a customer satisfaction survey to measure approval of the automated service. At the time, the IRS Commissioner responded that he agreed that measuring customer satisfaction for
    automated service was important. According to IRS officials, the needed computer programming changes were not done for the 2004 filing season, but are in the queue to be done when programming resources permit.

    IRS officials continue to attribute the decline in tax law accuracy rate
    primarily to changes made to the CSR's Probe and Response (P&R) Guide, a publication that CSRs use to help them answer taxpayers' tax law

    17 GAO03143.

    questions. Last year, we reported18 that IRS attributed
    the decline in the tax
    law accuracy rate on a new format for the P&R guide, among other factors.
    At that time, an IRS official believed that after CSRs became familiar with the guide, the problem would be resolved and IRS continued using the new format. IRS began to address the problems with the P&R
    guide during the 2004 filing season. For example, CSRs told us that they attended a meeting of managers and CSRs in March 2004 to identify the problems with the guide and develop an action plan to correct the problems.
    According to IRS officials, IRS tested changes to the guide at the St. Louis, Missouri and Cleveland, Ohio call sites in June 2004. In addition, IRS has a written plan
    with deadlines for testing the guide for the 2005 tax filing season. The new
    guide was to be made available in hardcopy
    by October 1, 2004 and was to be used for purposes of training employees before the start of the 2005 filing season.

    IRS Initiated Two Pilot Programs For Telephone Service

    IRS initiated two pilot programs in 2004 to assess options for
    improvements on its tollfree telephone services. IRS piloted having a
    contractor answer tax law questions instead of IRS employees to determine (1) if a contractor could deliver an equal or superior level of service and (2) the public's
    perception regarding being assisted by someone other than
    IRS employees. IRS routed 10 percent of the tax law
    calls19 received on its
    tollfree lines to a contractor for 60 days (February through April 2004). With respect to the accuracy of tax law responses provided to taxpayers, the contractor's performance was about half that of IRS's-44.6 versus 82.46 percent, respectively. IRS attributed the contractor's performance to
    a longerthanexpected learning curve. Also, taxpayers' raised concerns
    regarding privacy, although no confidential information is shared in
    answering tax law questions. In September 2004, IRS officials decided not
    to go forward with further testing.

    The second pilot was for contact recording, which involves recording all
    telephone contacts between taxpayers and CSRs and, for 10 percent of the calls, also capturing computer screen displays accessed by the CSR. It is
    intended to enable supervisors to provide CSRs with more complete

    18 GAO, Tax Administration: IRS's 2003 Filing Season Performance Showed
    Improvements, GAO0484 (Washington, D.C.: Oct. 2003).

    19 The study did not include questions related to taxpayer accounts.

    feedback on their performance. Figure 5 illustrates the process for contact
    recording.

                     Figure 5: The Contact Recording Pilot Process

    Source: GAO analysis of IRS data and Art Explosion.

    IRS conducted the contact recording pilot
    from January through April 2004 at three call
    sites. According to IRS officials and our interviews with
    CSRs, CSRs liked being able
    to hear and see how they handled calls. In September
    2004, IRS officials told us that they had decided to implement contact
    recording at all call sites by the end of the 2005 filing season.

    Taxpayer Use of IRS Walkin Sites Continued to Decrease While Use of Volunteer Sites Increased; Quality Data Are Limited

    The total number of taxpayers visiting IRS walkin sites continued to
    decrease while those having their returns prepared at volunteer sites
    increased. Available data raise questions, however, about the quality of
    services provided at both walkin and volunteer sites. IRS has initiatives under way intended to improve the quality of data, though implementation may not be ready for the 2005 filing season.

    Number of Taxpayers Based on the data obtained from IRS and shown in figure 6, the total Visiting IRS
    Walkin Sites number
    of taxpayers seeking assistance at IRS sites declined an average of Decreased While Number At
    over 8 percent per year between 2001 and 2004. IRS officials attributed the

    overall decrease to taxpayers' use of more convenient means to obtainVolunteer Sites Increased
    services, such as IRS's tollfree telephone lines and Web site. Taxpayers

    seeking return preparation assistance at walkin sites decreased an average
    of 26 percent per year between 2001 and 2004.

    In contrast, since 2001, the number of taxpayers seeking return preparation assistance at volunteer sites increased an average of 19 percent per year. During the 2004 filing season, taxpayers had over five times more returns prepared at volunteer
    sites than at IRS walkin sites.
    These divergent trends reflect IRS's strategy to shift return preparation to sites staffed by volunteer and communitybased coalitions that are overseen by IRS. IRS has
    encouraged the shift by advertising the locations of these sites.

    Figure 6: Assistance Provided by IRS Walk-in and Volunteer Sites,
    2001-2004 Filing Season (in millions)

    Millions at IRS walk-in sites Millions at volunteer sites 66

    55

    44

    33

    22

    11

    00 2001 2002 2003 2004 2001 2002 2003 2004

    Return prep at IRS walk-in sites Return prep at volunteer sites

    Other walk-in contacts

    Source: GAO analysis of IRS data.

    Note: "Other walk-in contacts" includes assistance for account notices,
    tax law inquiries, forms, and
    compliance work, but not return preparation. For the walk-in sites, the
    time periods covered are
    December 31, 2000 through April 28, 2001; December 30, 2001 through April
    27, 2002;
    December 29, 2002 through April 26, 2003; and December 28, 2003 through
    April 24, 2004. For
    volunteer sites, the time period covered for 2001 is January 1, 2001
    through April 21, 2001; all other
    periods are the same as those for IRS walk-in sites.

    The shift of taxpayers from walkin to volunteer sites is important because
    it has transferred some timeconsuming services, such as return
    preparation, from IRS to volunteer sites. It also enabled IRS to
    shift more

    taxpayers to its telephone and Web site services, allowing it to
    concentrate on services at walkin sites that only IRS can provide, such as account
    assistance or compliance work (see app. 2).

    Limited Data Raise Questions About the Quality of Services
    at Walkin and Volunteer Sites

    While shifting taxpayers from
    IRS walkin sites to volunteer sites has the advantage of freeing up some IRS resources, IRS has limited performance measures and data
    on the quality of tax law assistance, account assistance,
    timeliness, and return preparation provided at either type of site. We have noted in prior filing season reports that this raises concerns about quality and oversight.20

    o 	Tax Law Assistance: Both TIGTA and IRS reported that IRS had not
    reached its goal of 80 percent accuracy at the walkin sites they visited.21
    Since the sites were selected judgmentally, the results cannot be projected to all sites.

    o 	Account Assistance: During the 2004 filing season, IRS did not measure
    account assistance accuracy at its walkin sites. According to IRS
    officials, the focus on tax law accuracy diverted staffing resources from gathering data on account assistance accuracy.

    o
       	Timeliness: IRS also did not measure timeliness, although GAO has recommended22 that IRS readopt a timeliness measure for its walkin sites, stating that the presence of a quality measure should provide balance and a disincentive for employees to ignore quality in favor of timeliness.

    20 GAO0484 and GAO, Tax Administration, Assessment of IRS' 2000 Tax Filing
    Season, GAO01158 (Washington, D.C.: Dec. 22, 2000). Also, see GAO03143 for
    further discussion of data and measures for IRS walkin sites.

    21 Treasury Inspector General for Tax Administration, Taxpayer Experience
    at the Taxpayer Assistance Centers Could be
    Improved, Reference No. 200440152 (Washington, D.C.: 2004).

    22 GAO03143.

    o 	Return Preparation: The utility of the current measure for accuracy of
    return preparation assistance provided at walkin and volunteer sites is
    limited, because it narrowly defines accuracy. It counts a return as accurate only if no calculation errors or other obvious factual errors, such as omitted or inconsistent data, are identified on the return. In addition, the results of recent TIGTA audits raise questions about the
    accuracy of return preparation assistance at both walkin and
    volunteer sites.23

    IRS Has Initiatives Under Way Intended
    to Better Measure Quality at Walkin and Volunteer
    Sites Though Implementation May Not be Timely

    IRS has initiatives under way intended to better measure the quality of key services at walkin and volunteer sites. Key parts of both the walkin and volunteer site initiatives that were scheduled for implementation in 2005, have experienced delays, have important details to be determined, and may not be implemented on schedule. The initiative for walkin sites has the following four components.

    o 	Embedded Quality provides a standardized checklist for managers to
    measure the accuracy, professionalism, and timeliness of employee responses to taxpayers. Initially under Embedded Quality, a manager
    will directly observe the employee/taxpayer interaction. However, this could yield biased data, because employees will know they are being observed, which could influence their behavior. Consequently, Embedded Quality data gathered by direct observation may not be representative of true performance.

    o 	Contact Recording24
    will replace direct observation as the method for gathering data on Embedded Quality. Under contact recording, the
    IRS employee/taxpayer interactions will be recorded and a random sample
    assessed using the Embedded Quality checklist. A pilot was scheduled to begin in August 2004. According to IRS, as of September, the Department of Treasury
    has not yet approved the pilot. It is unlikely the pilot will
    begin until January 2005. Since the pilot and evaluation are

    23 Treasury Inspector General for Tax Administration, Improvements Are
    Needed to Ensure Tax Returns Are Correctly Prepared at Taxpayer Assistance
    Centers, Reference No. 200440025,
    (Washington, D.C.: 2003) and Treasury Inspector General for Tax
    Administration,

    Improvements Are Needed to Ensure Tax Returns Are Prepared Correctly at
    Internal Revenue Service Volunteer Income Tax Assistance
    Sites, Reference No. 200440154, (Washington, D.C.: 2004).

    24 Contact recording for IRS walkin sites is similar to the one
    for IRS's telephone system.

    planned to take 3 months, it is also unlikely that contact recording will
    be fully implemented until well into the 2005 filing season.

    o 	Q-Matic
    is an automated system that keeps track of such things as customer waittime, assistance provided, and staff time used. As of
    September 2004, QMatic implementation is proceeding on schedule.

    o 	Performance-based individual
    learning (ELearning) is a training component that will be used to identify and address deficiencies.

    Until contact recording replaces direct manager observation as a means of gathering data, IRS may have biased data on the quality of its walkin services. Such biased data has significant limitations for drawing conclusions regarding performance and for making comparisons to other
    years. This in turn creates difficulties for managers trying to identify
    problems and make improvements to service. Furthermore, until
    Embedded Quality and contact recording are implemented together for a
    full filing season, assessing quality at walkin sites will be based on two different data collection methods, thus limiting comparisons.

    At volunteer sites, IRS plans to implement the following;

    o 	Quality Assurance is an initiative where IRS, working with volunteer
    and communitybased coalitions, is developing quality standards and a means of monitoring the quality of return preparation services.25 This is
    consistent with an earlier recommendation we made for IRS to develop performance measures for volunteer sites to help ensure that taxpayers were receiving an adequate level of service.26 IRS planned to implement
    the initiative for the 2005 filing season. However, as of September 2004,
    IRS had missed its milestones for developing guidelines for monitoring volunteer
    sites, and was still developing and revising its implementation plans, revising its schedule, and determining important details, such as
    how and when volunteer sites will be monitored and how quality will be
    measured.

    25
    According to IRS officials, IRS and members of communitybased coalitions will likely
    share responsibility for monitoring volunteer sites. IRS officials will conduct various types
    of visits to volunteer sites. With some visits, IRS
    officials will visit a statistically valid
    sample to observe volunteers and operational procedures. With others, they
    will have returns prepared by volunteers, similar to TIGTA's audit
    in the 2004 filing season.

    26 GAO01158.

    We are concerned that the Quality Assurance initiative may not be implemented in
    time to measure performance for the
    2005 filing season. As with IRS's initiative for its walkin
    sites, until Quality Assurance is fully implemented, IRS will
    continue to have limited and potentially unreliable
    information on the quality of return preparation at volunteer sites for the
    2005 filing season. As a result, IRS officials have less information available when making decisions about the role of volunteer sites and how IRS should support them.

    Use of IRS's Web Site Increased, But Concerns Exist About a Feature for
    Answering Tax Law Questions

    IRS's Web site is important because it provides taxpayers and tax practitioners with customer service without having to directly contact IRS employees. Although overall Web site usage increased over last year, we have some concerns about IRS's performance answering tax law questions.

    Web Site Use Increased and the Site Was User Friendly and Highly Rated

    IRS's Web site usage increased in 2004, continuing a trend as shown in table
    2.27 Further, there was extensive use of the "Remember Your
    Advanced Child Tax Credit" feature that was new in 2004.

    27 IRS officials believe that the 2004 Forms, publications and other
    documents download figure reported in table 2 is understated when compared
    to last year for two
    reasons. First, a major Form 1040 file was not formatted the same as last
    year by error, resulting in significantly
    fewer downloads being reported. Second, taxpayers can now view publications
    and instructions directly via the Web site's normal search function and these views
    do not count as
    the form being downloaded. Evidence exists to support IRS's contention that
    downloads would have been higher.

                     Table 2: Use of IRS's Web site from 2001-2004

                   Web site usage         2001         2002       2003       2004
             Forms, Publications,
                              and
                  Other Documents
                       Downloaded  279 million 379 million         457        464
                                                               million    million
                Where's My Refund
                                           Not          Not
                        inquiries   applicable   applicable 17 million 23 million

    Remember Your Advanced
    Child Tax Credit inquiries Not applicable Not applicable Not applicable 11
    million

    Source: GAO analysis of IRS data.

    Note: All figures rounded to closest million, as of August 31, 2004.

    Overall we found that
    IRS's Web site was userfriendly and generally easy to
    access and use. For example, based on our knowledge of the type of information taxpayers look for, we found (1) no broken links or outdated
    or inconsistent data; (2) facts and information were logically arranged and easy to obtain; (3) with few
    exceptions, search functions guided us to
    appropriate forms, publications and information; and (4) response time was quick. However, we still have concerns about the feature answering tax law questions.

    Two independent assessments done by Keynote and Brown University's
    Center for Public Policy confirmed our observations on IRS's Web site.

    o
       	Keynote, an independent Web site rater of Internet performance, reported that IRS's site performed very well. Keynote reported that, for
    the average delivery time to download to IRS's Web site homepage, IRS was in the top 10 out of 40 government agencies measured for 12 of 15 weeks during the filing season. It also reported that, during the filing
    season, IRS's response time was consistent with other organizations being measured. Finally, Keynote reported that, when it comes to success rate (being able to access a desired location on the Web site) IRS was always at 99 or 100 percent for the filing season.

    o 	Brown
    University's Center for Public Policy rated IRS's Web Site 5th out
    of 60 federal government Web sites in providing service to citizens.

    Performance and Use of Tax Law Assistance Feature Declined

    The quality of IRS's Electronic Tax Law Assistance (ETLA) feature, which enables taxpayers and practitioners to ask tax law questions via the Internet and receive an email response from IRS, has declined. Usage has also declined, apparently by design.

    IRS did not meet its 2004 goal to respond to email questions within 2
    business days. On average, IRS responded to email questions in over 3
    business days and only reached the 2 business day goal in 6 of the 27
    tax law categories. Neither did IRS meet its accuracy goal. IRS's performance data showed that IRS answered about 64 percent of the email
    questions accurately, compared to its goal of 78 percent.

    IRS did not meet its goals because of a mismatch between the number of
    questions from taxpayers and staff available to respond to the questions. At the beginning of the 2004 filing season, IRS increased the prominence of
    the ETLA feature. However, an IRS official told us that this resulted in the site receiving more questions than staff could handle. The official said that
    in response IRS moved the ETLA feature to a less prominent position on the Web site. In fact, in its current location, IRS does not expect taxpayers to be aware of the ETLA feature unless they stumble upon it
    accidentally while looking for other information on IRS's
    Web site. As a result, the ETLA feature was used significantly less this year than last. In 2004, taxpayers and practitioners submitted about 90,000 tax law and procedural questions via the Web site, down from 153,000 in 2003, a 41 percent decrease. IRS officials have decided not to move the ETLA feature to a more prominent
    location as of October 2004.

    Although the number of questions received from taxpayers via the Web site
    is small, when compared to the number of questions received over the telephone, providing accurate responses to these questions is particularly
    important. Not only do inaccurate and untimely responses disappoint the taxpayers asking the questions, IRS also runs the risk of widespread dissemination of inaccurate email responses to other taxpayers.

    The decisions about the prominence of the feature and
    staffing are related. Achieving timeliness and accuracy goals depends, in part, on recognizing that decisions about the prominence of the feature, which affect taxpayer demand, and decisions about staffing are related. If IRS is unwilling to
    devote significant staff to answering tax law questions, then the feature cannot be prominent on the Web site. If IRS believes the feature is worth making prominent, then there are implications for staffing. For the 2004 filing season, IRS's decisions failed to recognize the relationship.

    IRS Continues to Offer New Web Services

    IRS continued to offer new services via its Web site. New services are popular with taxpayers, as shown by the increasing use of features, such as
    "Where's My Refund?" shown in table 2. In 2004, IRS added the following customer service features for taxpayers and tax practitioners.

    o
       	"Remember Your Advanced Child Tax Credit" that allows taxpayers to check the amount of their child tax credit.

    o 	"EServices" which is a suite of Internet services for tax practitioners
    that is previously discussed in the processing section of this report.

    Conclusions	IRS improved its filing season performance this year compared to last.
    More importantly, in many areas the improved performance is part of a trend that IRS is sustaining over time. IRS's filing season performance is
    important because it affects over 100 million taxpayers. Taxpayers want a quick turnaround on their refunds; they want easy access to IRS's
    telephone assistors if they have questions; and they want to instantly
    download forms and publications when they need them.

    The improvements we found are the result of systematic, longterm efforts by IRS. Processing results have improved and resources have been saved because of IRS's promotion of electronic filing, telephone access has improved
    because IRS implemented new call routing technology, and laborintensive walkin assistance is decreasing because of improvements to
    alternative services. IRS should be commended for its efforts to improve service.

    At the same time, however, we have identified several areas that present opportunities for further improvement. IRS has limited performance measures and data with which to assess the quality of services at walkin
    and volunteer sites, primarily because its initiatives for doing so are only partially implemented. IRS deserves credit for planning initiatives to
    address these data limitations. However, we are concerned that until the
    walkin initiative is fully implemented, IRS will have biased quality data on walkin service. Furthermore, the history of delays and incomplete plans for the walkin and volunteer site initiatives leaves us unsure about when IRS will fully implement them. Until IRS fully implements
    these initiatives
    and gathers data on quality, it may not be able to effectively monitor and improve performance at its walkin sites or volunteer sites and, as a consequence, could be risking its credibility among taxpayers who use the

    sites and the communitybased coalitions that prepare returns
    at volunteer sites.

    Finally, IRS failed to meet its goals for accuracy and timeliness of email
    responses to tax law questions, at least in
    part, by failing to match taxpayer
    demand for the feature with staffing. The risk associated with providing
    inaccurate email responses may be high because of the potential for widespread dissemination.

    Recommendations 	To address problems with the data for assessing the quality of services at
    IRS walkin and volunteer sites, we recommend that the Commissioner of Internal Revenue direct the appropriate officials to

    o 	recognize and disclose the limitations of the Embedded Quality
    performance data that will be obtained by direct management
    observation in 2005 when interpreting and reporting on service quality at walkin sites;

    o
       	ensure that the causes of delays in implementing improved quality measurement at walkin sites are addressed; and

    o
       	ensure that the delays with the development and implementation of the Quality Assurance initiative at volunteer sites are addressed.

    With respect to the Web site's ETLA feature, we recommend that the Commissioner

    o
       	recognize that decisions about the prominence and staffing to give the feature are related.

    Agency Comments and Our Evaluation

    The Commissioner of Internal Revenue provided written comments in a November 8, 2004, letter (see app. III). The Commissioner noted that the 2004 filing season was one of the best ever, with improved telephone service, timely and effective return processing, substantial increases in
    electronic filing, and a successful shift in the number of tax returns prepared in IRS walkin sites to volunteer sites. The Commissioner said he appreciated that our report recognized IRS's achievements for this filing season and over the past few years as well.

    The Commissioner agreed with the importance of recognizing and disclosing the limitations of performance data obtained by managers directly observing employees in 2005. He also said that IRS has
    communicated the limitations in briefings with all levels of management and outside stakeholders, and will continue to do so. However, the Commissioner differs with our assessment of the extent of the limitations
    in the data. While he agreed that there may be some bias in the data because employees know that their managers are observing them, he disagreed with our subsequent finding that data obtained through this
    method may not be representative of true performance. However, as our
    report indicates, because of the potential for bias and absence of other
    data, we cannot determine if the observed performance is representative or
    not. Further, according to IRS officials, the accuracy rates compiled by the quality review staff and managerial reviews cited by the Commissioner are not based on statistically representative samples.

    The Commissioner agreed with the recommendation to ensure that causes
    of delays in implementing improved quality measurement at walkin sites
    are addressed. He said that while the delay in the implementation of
    contact recording as a means of collecting embedded quality data is
    attributable to the lengthy approval process, IRS expects to begin the contact recording pilot by January 2005 and is
    on target for postpilot initial
    implementation for the last quarter of fiscal year 2005. Regarding volunteer sites, the Commissioner also agreed with the recommendation to implement quality initiatives in a timely manner and address delays.

    The Commissioner agreed with the intent of our recommendation about the ETLA feature, but disagreed with our assessment of the cause. He agreed that it is important to recognize the relationship between the
    prominence of the feature and staffing, but disagreed that the decline in
    ETLA performance is attributable to inadequate recognition of this
    relationship. He stated that the ETLA feature was inadvertently placed in a
    more prominent location on IRS's Web site, thus creating unexpected
    demand. However, inadvertent placement suggests that the IRS needs to be more deliberative in recognizing the impact that placement of this feature can have on demand and staffing.

    We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Finance, the House Committee on Ways and Means, and the Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means. We are also sending

    copies to the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director, Office of Management and Budget; and other
    interested parties. We will also make copies available to others on request.
    In addition, the report will be available at no charge on
    the GAO Web site at http://www.gao.gov.

    This report was prepared under the direction of Joanna M. Stamatiades,
    Assistant Director. Other major contributors are acknowledged in
    appendix IV. If you have any questions about this report, contact me on
    (202) 5129110.

    Sincerely yours,

    James R. White Director, Tax Issues

    Appendix I

    Data on IRS's Processing Performance Relative to Fiscal Year 20012003 Performance and Fiscal Year 2004 Goals

    As table 3 shows, the Internal Revenue Service (IRS) nearly met or
    exceeded seven out of the eight processing performance goals in 2004. For
    four measures (i.e., deposit error rate, deposit timeliness, refund interest
    paid, and productivity), IRS exceeded its goals. For two of the measures, IRS met their goals. For the remaining two, IRS missed its goals by a statistically significant amount. In the case of
    refund timeliness, however,
    the point estimate of 98.2 percent, nearly met the goal of 98.4 percent. In the case of letter error rate, the point estimate was 7 percent compared to
    the goal of 6.2 percent-13 percent greater than the 2004 goal.

    Comparing actual 2004 performance to 2003 shows that IRS's performance improved or remained about the same
    for six out of the seven measures that could be compared. Table 3 also shows that IRS's processing performance in 2004 has generally improved in comparison to 2002 and 2001 for the measures that could be compared.

                    Table 3: IRS's Processing Performance, 2001-2004

    Fiscal year Fiscal year Fiscal year Fiscal year 2001 2002 2003 2004 actual
    Fiscal year Measure name Definition actualb actual actual (through July)a
    2004 goal

    Deposit error Percentage of payments
           rate-      applied in error by,
                          for example,
                     reimbursing a taxpayer
                               who
                        overpaid when the
                            taxpayer
                     wanted any overpayment  5.0%  4.8%     4.2%     3.6%    4.0%
                     credited to next year's
                            tax bill.             +/-.3%d +/-.3% d +/-.34% d

                           Interest    Not
            Deposit       foregone by  comparable        Not
                              not      Not            comparable
                                       comparable
                         depositing       because of
    timeliness-paper  monies the       because of  because of
                         business
                           day after    revisions to revisions to
                         receipt, per  the revisions     the
                          $1 million          to the
                         in deposits.       measure.
                            Measure         measure.   measure.
                            assumes
                         an 8 percent
                           interest                                $422 e    $500
                             rate.
                         Percentage of
    Letter error rate    letters         Not
                           issued to    comparable
                           taxpayers
                          with errors   because of
                           (includes
                           systemic     revisions to         7.1%      7.0%  6.2%
                           errors).c        the 7.4%
                                        measure. +/-     +/-.5% d +/-.41% d
                                               .6% d
                         Percentage of
    Notice error rate incorrect          Not
                         notices        comparable
                           issued to
                           taxpayers    because of
                           (includes
                           systemic     revisions to         9.4%      9.4% 10.3%
                          errors). c       the 18.7%
                                        measure. +/-              +/-1.60%
                                              2.4% d  +/- 1.2% d      d

        Appendix I Data on IRS's Processing Performance Relative to Fiscal Year
                    2001-2003 Performance and Fiscal Year 2004 Goals

                             (Continued From Previous Page)

                                       Fiscal year       Fiscal    Fiscal
                                       Fiscal year         year      year
                                            2001 2002      2003      2004  Fiscal
                                                                   actual    year
        Measure name     Definition    actualb actual    actual (through     2004
                                                                July)a       goal
        Refund error   The percentage
            rate       of refunds with
                         IRS-caused
         -individual    errors in the
                           entity
                         information
           (paper)         (e.g.,
                          incorrect
                        name, Social
                          Security
                           number,
                          or refund
                          amount);          9.8% 8.0%      5.3%      4.9%    5.3%
                          includes
                          csystemic        +/- .46% d +/-.41% d +/-.43% d
                           errors.
                          Amount of
    Refund interest refund interest Not comparable
                             IRS       Not comparable
                         paid per $1       because of
            paid         million of        because of
                           refunds
                                       revisions to
                           issued.     the revisions
                                       to the
                                             measure.    $36.29    $21.43  $66.00
                                             measure.
           Refund       Percentage of
                       refunds issued
         timeliness-   within 40 days     95.2% 98.2%     98.8%     98.2%   98.4%
                          or less.
         individual                         +/- .32%d  +/-.26%d +/- .16%d
           (paper)
                       Weighted volume
        Productivity   of documents
                        processed per
                         staff year
                       expended at the
                         processing
                          centers.      30,133 28,389    30,179    30,236  29,530

    Note: GAO analysis of IRS data.

    a The measures for fiscal year 2004 are through July 31, which were the
    latest data available at the time we ended our audit work. According to
    IRS officials, the 2004 results through July 31 are reflective of IRS's
    performance during the filing season. In addition, IRS officials told us
    that the results for the measures should not change significantly through
    September 30.

    b According to IRS officials, they did not compute a margin of error for
    these measures in 2001.

    c Systemic errors are computer-generated errors over which a particular
    processing center would have no control.

    d IRS estimates these measures to have a 90 percent confidence interval.

    e IRS's measure for Deposit timeliness for 2004 was not comparable to
    previous years because IRS changed the formula to not include weekends in
    calculating timeliness.

    Appendix II

    IRS Spends Thousands of Staff Years on Filing Season Activities

    IRS's performance during the filing season has significant budgetary
    implications because IRS spends thousands of staff years on its key filing
    season activities.1

    Table 4 shows IRS has significantly decreased the number of staff years2
    used for key activities related to processing individual tax returns
    between fiscal years 1999 and 2003.3 The number of staff years used for
    key processing activities such as data transcription and correcting errors
    has decreased over 17 percent during this period.4 Beginning in fiscal
    year 2001, IRS separated the processing of individual and business tax
    returns and began consolidating paper processing centers. IRS officials
    expect additional savings when it further consolidates processing paper
    operations in Memphis, Tennessee in 2005.

    1 The source of data for this appendix is IRS's time and attendance
    systems, the output of which is used to calculate IRS's payroll expenses.
    IRS reports these payroll expenses annually in its Statement of Net Cost,
    the reliability of which GAO tests as part of our audits of IRS's
    financial statements. These audits have concluded that for the fiscal
    years ended September 30, 2000 through 2003, IRS's Statement of Net Cost
    was reliable. See GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003
    Financial Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004).
    Therefore, the data is likely to be reliable to show trends over time.

    2 Staff years and Full-Time Equivalents are units of measurement that are
    often used interchangeably. According to IRS, a Full-Time Equivalent is
    the equivalent of one person working full-time for one year with no
    overtime. A staff year includes overtime. Therefore, the cost of one staff
    year is equal to the cost of one Full-Time Equivalent plus overtime.

    3 On a larger scale, we have previously reported that IRS spent about
    14,065 Full-Time Equivalents for all submission-processing activities and
    operations (i.e., both individual and business income tax returns and
    other correspondence work outside of processing returns) in fiscal year
    2003 or about 14 percent of its entire 98,381 Full-Time Equivalent
    allocation. This was down over 1,000 Full-Time Equivalents or 1 percent
    from around 15,101 Full-Time Equivalents used in fiscal year 2002. See
    GAO-04-560T and GAO, Internal Revenue Service: Assessment of Fiscal Year
    2004 Budget Request and 2003 Filing Season Performance to Date,
    GAO-03-641T (Washington, D.C.: Apr. 2003).

    4 According to IRS officials, the decrease in staff years for electronic
    filing is due to the reduction of documents required by IRS to be filed on
    paper. For example, power of attorney forms can now be filed
    electronically.

      Appendix II IRS Spends Thousands of Staff Years on Filing Season Activities

        Table 4: The Number of Staff Years Used in Key Processing Activities for
    Individual Income Tax Returns, Fiscal Years 1999-2003 Difference 1999-2003Fiscal
     year 1999 Fiscal year 2000 Fiscal year 2001 Fiscal year 2002 Fiscal year 2003
     Individual Staff Individual Staff Individual Staff Individual Staff Individual
    Staff Individual Staff income returns income returns income returns income
                         returns income returns income returns

    years used

    years used

    years used

    years used

    years used

    years used

      Paper                                                                               19%
                                                                                        17.6%
    processing  96,620 4,384  92,930 4,108  90,248 4,290  84,645 4,207  78,308 3,613 decrease
                                                                                     decrease
    Electronic                                                                            86%
                                                                                        19.3%
    processing  29,345  280   35,406  274   40,223  302   46,841  265   54,611  226  increase
                                                                                     decrease
      Total                                                                             5.5 %
               125,965 4,664 128,336 4,382 130,471 4,592 131,486 4,472 131,919 3,839    17.7%
                                                                                     increase
                                                                                     decrease

    Source: GAO analysis of IRS data.

    a Data for fiscal year 2004 were not available.

    Table 5 shows that IRS has consistently directed over 8,000 staff years to CSRs answering tollfree telephone calls that are not routed to automated services.5

    Table 5: Staff Years Directed to Answering Toll Free Calls Fiscal Year
    2001-2003

                                                                         Increase
                                                                          between
                               Fiscal year  Fiscal year  Fiscal year  fiscal year
                               2001 actual  2002 actual  2003 actual    2001-2003
                   Total calls
                   (thousands)       32,786       31,496       33,168
             Total staff years        8,397        8,340        8,491

    Source: GAO analysis of IRS.

    The total
    staff years used for walkin service has increased slightly between 2001 and 2003, ranging from
    2,121 in fiscal year 2001, to 2,208 in fiscal year 2002, and 2,256 in fiscal year 2003.

    5 IRS could not provide comparable information
    for fiscal years 1999 and 2000.

    Appendix II IRS Spends Thousands of Staff Years on Filing Season
    Activities

    However, the time IRS spent directly on return preparation assistance at
    walkin sites during the filing season has decreased significantly. As the demand for walkin assistance has declined, IRS has assigned walkin staff
    other responsibilities such as working on compliance cases. Figure 7 shows that direct FullTime Equivalents6 decreased 62 percent for time
    spent directly (not counting overhead) on return preparation services between 2001 and 2004.

    At the same time, IRS reduced its reliance on compliance staff at walkin sites. For years, IRS detailed staff from its compliance functions, such as
    Examination and Collection, to help provide walkin assistance during the filing season. IRS has now limited the number of such details. IRS reduced the number of compliance FullTime Equivalents detailed to assist at walkin sites from 244 in the 2001 filing season to 9 in the 2004 filing season.

    Figure 7: Direct Full-Time Equivalents Used for Return Preparation at IRS
    Walk-in Sites, 2001-2004 Filing Seasons

    FTEs

    300

    200

    100

    0 2001 2002 2003 2004

    Source: GAO analysis of IRS data.

    Note: The time periods covered by this figure are December 31, 2000
    through April 28, 2001; December 30, 2001 through April 27, 2002; December
    29, 2002 through April 26, 2003; and December 28, 2003 through April 24,
    2004.

    6 Staff year data were not available.
    According to IRS, a direct FullTime Equivalent does not include overhead.

                                      Appendix III

                       Comments from the Internal Revenue Service

    Appendix III Comments from the Internal Revenue Service Appendix III
    Comments from the Internal Revenue Service Appendix III Comments from the
    Internal Revenue Service Appendix III Comments from the Internal Revenue
    Service Appendix III Comments from the Internal Revenue Service Appendix
    III Comments from the Internal Revenue Service Appendix III Comments from
    the Internal Revenue Service Appendix III Comments from the Internal
    Revenue Service Appendix III Comments from the Internal Revenue Service

    Appendix IV

                         GAO Contacts and Staff Acknowledgments

    GAO Contacts	James White, (202) 5129110 Joanna Stamatiades, (404) 6791984

    Acknowledgments	In addition to those named above, Tiffany Brown, James Cook, Larry Dandridge, Evan Gilman, John Lesser, Karen O'Conor, Neil Pinney,
    and Amy Rosewarne made key contributions to this report.

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