Tax Administration: IRS Improved Some Filing Season Services, but
Long-term Goals Would Help Manage Strategic Trade-offs		 
(14-NOV-05, GAO-06-51). 					 
                                                                 
During the filing season, the Internal Revenue Service (IRS)	 
processes about 130 million individual tax returns, issues	 
refunds, and responds to millions of inquiries. Budget cuts	 
combined with IRS's strategy of shifting resources from taxpayer 
service to enforcement make providing quality service a 	 
challenge. GAO was asked to assess IRS's 2005 filing season	 
performance compared to past years and 2005 goals in the	 
processing of paper and electronic tax returns, telephone	 
service, face-to-face assistance, and Web site service. GAO also 
examined whether IRS has long-term goals to help assess progress 
and guide in making decisions. Finally, GAO summarized IRS's	 
response to Hurricanes Katrina and Rita, and their possible	 
effects on IRS's performance.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-51						        
    ACCNO:   A41337						        
  TITLE:     Tax Administration: IRS Improved Some Filing Season      
Services, but Long-term Goals Would Help Manage Strategic	 
Trade-offs							 
     DATE:   11/14/2005 
  SUBJECT:   Budget cuts					 
	     Customer service					 
	     Electronic forms					 
	     Income taxes					 
	     Performance measures				 
	     Strategic planning 				 
	     Tax administration 				 
	     Tax administration systems 			 
	     Tax refunds					 
	     Tax returns					 
	     Hurricane Katrina					 

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GAO-06-51

   

     * [1]Report to the Chairman, Subcommittee on Oversight, Committee on
       Ways and Means, House of Representatives

          * [2]November 2005
          * [3]Highlights

     * [4]tax administration

          * [5]IRS Improved Some Filing Season Services, but Long-term Goals
            Would Help Manage Strategic Trade-offs

     * [6]Contents

          * [7]Results in Brief
          * [8]Scope and Methodology
          * [9]Background
          * [10]IRS's Processing Performance Continued to Improve, and, for
            the First Time, More Returns Were Filed Electronically Than by
            Paper

               * [11]Most Measures Showed that IRS Continued to Improve Its
                 Processing Performance
               * [12]For the First Time, More Than Half of All Individual Tax
                 Returns Were Filed Electronically
               * [13]IRS Has Taken Actions to Encourage Electronic Filing but
                 Will Not Meet Long-term Goal
               * [14]State Mandates Have Encouraged Electronic Filing of
                 Federal Tax Returns

          * [15]IRS Reduced Access to Telephone Assistors, but Accuracy of
            Tax Law and Account Responses Significantly Improved

               * [16]IRS Reduced Access to Telephone Assistors
               * [17]Accuracy of Responses to Telephone Inquiries Improved
               * [18]IRS Has Efforts Intended to Improve Its Telephone
                 Services

          * [19]Fewer Taxpayers Used IRS Walk-in Sites and More Used
            Volunteer Sites, but IRS Lacks Reliable Quality and Other Data

               * [20]Fewer Taxpayers Used IRS Walk-in Sites for Return
                 Preparation and Other Types of Assistance, but Quality Data
                 Are Not Reliable
               * [21]More Taxpayers Sought Return Preparation Assistance from
                 Volunteer Sites, but Quality Data Are Not Reliable

          * [22]Web Site Performed Well, Was Highly Rated, and Used
            Extensively

               * [23]Web Site Performed Well and Was User Friendly
               * [24]Web Site Was Used Extensively

          * [25]IRS Is Developing Long-term Goals for Taxpayer Service, but
            Completion Date Is Unknown
          * [26]IRS Has Taken Numerous Actions to Deal with the Aftermath of
            Hurricanes Katrina and Rita, but Implications for the 2006 Filing
            Season Are Not Yet Known
          * [27]Conclusions
          * [28]Recommendations for Executive Action
          * [29]Agency Comments and Our Evaluation

     * [30]Data on Processing Performance Relative to Fiscal Years 2001
       through 2004 Performance and Fiscal Year 2005 Goals
     * [31]Budget Reduction Had Some Impact on Service to Taxpayers
     * [32]Comments from the Internal Revenue Service

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

November 2005

TAX ADMINISTRATION

IRS Improved Some Filing Season Services, but Long-term Goals Would Help
Manage Strategic Trade-offs

Contents

Tables

Figures

November 14, 2005

Letter

The Honorable Jim Ramstad
Chairman
Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Mr. Chairman,

During the filing season most taxpayers have their only contact with the
Internal Revenue Service (IRS) by filing their individual income tax
returns, receiving refunds, and, if needed, seeking assistance.
Consequently, the agency's performance during this period is a key
indicator of how well IRS is serving taxpayers and helping them fulfill
their tax responsibilities.^1

In past reports and testimonies we said that IRS has made significant
progress improving taxpayer service since passage of the IRS Restructuring
and Reform Act of 1998 (RRA).  ^2 However, we also described challenges to
continued progress. In fiscal year 2005, IRS's budget for taxpayer service
was 2.8 percent less than in 2004 and IRS has an ambitious strategy of
providing filing season services with fewer resources. This strategy is
intended to allow IRS to shift resources to enforcement.

Because of IRS's importance to taxpayers and Congress, you asked us to
assess IRS's 2005 filing season performance. With respect to processing
paper and electronically filed individual income tax returns, telephone
assistance, face-to-face assistance, and the Web site, our objectives were
to assess IRS's performance compared to annual goals and past performance
and describe any factors or initiatives that significantly affected
performance. Additionally, we examined whether IRS has long-term goals to
help assess progress and guide in resource and other decision making. In
light of Hurricanes Katrina and Rita, we summarized IRS's actions and
plans to assist affected taxpayers and the possible implications for the
2005 and 2006 filing seasons. We testified on IRS's interim 2005
performance in a hearing held by your Subcommittee on Oversight, House
Committee on Ways and Means, on April 14, 2005.^3

Our assessment is based on the reported results and analysis of key IRS
performance measures, observations of IRS's operations, interviews with
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 IRS's
data to be sufficiently reliable for assessing IRS's 2005 filing season
performance and comparing to prior filing seasons. Further details on our
scope and methodology are provided later in this report. We performed our
work from January through October 2005 in accordance with generally
accepted government auditing standards.

Results in Brief

During the 2005 filing season, IRS improved some services, but to
accommodate budget cuts, officials made a strategic decision to reduce
others. With one notable exception, IRS currently lacks, but is
developing, long-term goals that would be useful for managing budgetary
trade-offs between improving taxpayer service and enhancing enforcement.

Processing: IRS nearly met or exceeded most of its 2005 processing
performance goals. For the first time, more than half of all individual
income tax returns were filed electronically. Despite numerous actions IRS
has taken over the years, it is not on track to meet its one long-term
goal of having 80 percent of all returns filed electronically by 2007.
Electronic filing mandates in several states for certain categories of tax
practitioners have increased electronic filing of federal tax returns. The
growing use of mandates by states for electronic filing could lead to more
discussion about mandates at the federal level. In fact, one IRS advisory
group recommended that IRS should support mandated electronic filing.
However, decision makers lack information on the costs that tax
practitioners and taxpayers would incur to file electronically.

Telephone service: IRS made a strategic decision to reduce access to its
telephone service to accommodate a budget reduction, because IRS officials
viewed it as flexible area for absorbing budget reductions without
significantly affecting taxpayer service. As a result, taxpayers waited
longer to speak with telephone assistors and more taxpayers hung up than
last year. In contrast, the accuracy of customer service representatives'
(CSR) responses to tax law and account questions significantly improved
compared to past performance.

Walk-in assistance: Fewer taxpayers used IRS walk-in sites during the 2005
filing season, continuing a trend since 2001. In contrast to walk-in
sites, the numbers of taxpayers seeking return preparation assistance at
volunteer sites increased since 2001. These trends are consistent with
IRS's strategy of reducing face-to-face assistance in favor of less costly
options for receiving service, such as IRS's telephone and Internet
services, and volunteer sites. Moreover, IRS lacked reliable data on the
quality of services provided at both walk-in and volunteer sites, making
it impossible to accurately characterize IRS's performance in providing
face-to-face assistance. In an effort to obtain reliable data, IRS has
initiated quality improvement programs at both sites.

Internet Web site: IRS's Web site performed well, was user friendly, and
was used extensively this filing season based on the number of visits to
the site, pages viewed, and forms and publications downloaded. This is
consistent with IRS's strategy to improve taxpayer service by providing
options for automated interaction with the IRS, such as "Where's My
Refund."

Long-term goals that are focused on results or outcomes are critical for
holding agencies accountable and helping agencies and Congress make
strategic trade-offs. IRS has been working to establish long-term goals
for all aspects of its operations for well over a year. Because of the
difficulty in developing goals, IRS has experienced delays and lacks a
schedule for finalizing those goals. Although we recognize the difficulty
in establishing such goals, until they are developed, taxpayers, Congress,
and IRS management will have difficulty assessing long-term progress. In
addition, budget decisions that affect the filing season will be made with
limited context about the potential impact on long-term performance.

IRS had taken numerous actions to address the aftermath of Hurricanes
Katrina and Rita, working closely with, and in support of, other the
federal agencies. IRS officials report that any effect on the 2005 filing
season performance would be slight, because the hurricanes occurred so
late in the filing season. Actions taken to date include finding IRS
employees who had been affected by Katrina and Rita, helping answer
telephone calls for emergency assistance, reviewing tax provisions, and
putting extensive information about taxpayer assistance and relief for
individuals and businesses on its Web site; other actions are planned.
According to IRS officials, IRS is also assessing the longer term
implications of the hurricanes for the 2006 filing season, such as the
potential impact on the number of telephone inquiries.

We are making recommendations to the Commissioner of Internal Revenue that
IRS should

odevelop better information about the costs to tax practitioners and
taxpayers of mandatory electronic filing of tax returns for certain
categories of tax practitioners and

oestablish a schedule for developing its long-term goals.

In a letter commenting on a draft of this report (see app. III), the
Commissioner of IRS agreed with our recommendations and generally outlined
the actions IRS plans to take to address those recommendations.

Scope and Methodology

To assess IRS's 2005 filing season performance in the four key filing
season activities--processing, telephone assistance, face-to-face
assistance, and Web site--compared to goals, past performance, as well as
initiatives intended to improve performance, we

oreviewed and analyzed IRS reports, testimonies, budget submissions, and
other documents and data, including workload data and data from IRS's
current suite of balanced performance measures and annual goals;

oreviewed legislation, policies, and procedures;

oreviewed related TIGTA reports and interviewed TIGTA officials about
IRS's performance and initiatives;

ofollowed up on our recommendations made in prior filing season and
related reports;

otested for statistical differences between yearly changes for various
performance measures;

oobserved operations at IRS's Atlanta paper processing center, and Atlanta
and Pittsburgh call centers, all of which are managed by IRS's Wage and
Investment operating division (W&I); 3 of IRS's approximately 400 walk-in
locations;^4 and 3 of over 14,000 volunteer sites.

oanalyzed information posted to IRS's Web site based on our knowledge of
the type of information taxpayers look for, and assessed the ease of
finding information, as well as the accuracy and currency of the data on
the site;

oreviewed information from companies that evaluate Internet performance;

oreviewed staffing data for paper and electronic processing, telephone
assistance, and walk-in assistance;

ointerviewed IRS officials about current operations, performance relative
to 2005 performance goals, and prior filing season performance, trends,
and significant factors and initiatives that affected or were intended to
improve performance; and

ointerviewed representatives of large private and nonprofit organizations
that prepare tax returns and trade organizations that represent both
individual practitioners and tax preparation companies.

This report discusses numerous filing season performance measures and data
that cover the quality, accessibility, and timeliness of IRS's services,
which we have used to evaluate IRS's performance in key areas for years.
Although some measures could be further refined, the majority of IRS's
filing season measures have the attributes of successful measures,
including objectivity and reliability. We reviewed IRS documentation,
interviewed IRS officials about computer systems and data limitations, and
compared those results to GAO standards of data reliability.^5 As a
result, we determined that the IRS data we are reporting are sufficiently
reliable for assessing IRS's filing season performance. Data limitations
are discussed where appropriate.

We conducted our work at IRS headquarters in Washington, D.C.; the Small
Business/Self-Employed Division headquarters in New Carrollton, Maryland;
the W&I Division headquarters, the Joint Operations Center (which manages
telephone service), and a telephone call site in Atlanta, Georgia; a
telephone call site in Pittsburgh, Pennsylvania; and walk-in and volunteer
locations in Georgia and Maryland. We selected these offices for a variety
of reasons, including the location of key IRS managers, such as those
responsible for telephone, walk-in, and volunteer services. Hurricanes
Katrina and Rita struck just as we were completing our 2005 filing season
review.^6 Because Katrina and Rita occurred when we were finishing our
work, we did not assess the effectiveness of IRS's actions. We performed
our work from January through October 2005 in accordance with generally
accepted government auditing standards.

Background

IRS received over $10 billion in fiscal year 2005 to fund over 96,000
full-time equivalents (FTE).^7 Of the total, processing and taxpayer
services account for 41 percent, almost 40,000 FTEs, as shown in figure 1.
Of the roughly 40,000 FTEs, almost 16,000, just less than 40 percent, were
budgeted just for processing, most of which occurs during the filing
season.

Figure 1: Full-time Equivalents Budgeted for IRS Activities, Fiscal Year
2005

IRS provides a variety of taxpayer services. Tens of millions of taxpayers
receive telephone assistance. Taxpayers call IRS to inquire about their
refunds, the tax laws, or their accounts. The calls are answered by CSRs
or automated services.

For face-to-face assistance, IRS has approximately 400 walk-in sites where
taxpayers ask basic tax law questions, get account information, receive
assistance with their accounts, and have returns prepared (if annual gross
income is $36,000 or less).^8 Also, low-income and elderly taxpayers get
returns prepared at over 14,000 volunteer sites run by community-based
coalitions that partner with IRS. IRS's Stakeholder Partnership,
Education, and Communication (SPEC) organization fosters relationships
between IRS and the nonprofit community to provide an alternative means
for taxpayers to receive volunteer return preparation assistance.
According to IRS, SPEC officials identify and select partners, such as the
American Association of Retired Persons, that meet taxpayer needs, such as
tax assistance for the elderly, and help train, provide resource
materials, and oversee operations at these partners' facilities. In some
cases, IRS awards grants, trains and certifies volunteers, and provides
reference materials, computer software, and computers to these volunteers.

IRS now provides many Internet services that did not exist a few years
ago. For example, the "Where's My Refund" feature has the benefit of
reducing phone calls and enables taxpayers to use the IRS Web site to find
out if IRS received their tax returns and whether their refunds were
processed. IRS's filing season activities and associated workload volumes
are depicted in figure 2.

Figure 2: IRS's 2005 Filing Season Activities

Notes: The number of paper and electronic returns and refunds are
estimated for the time period January 1, 2005, to September 16, 2005;
toll-free calls for the time period January 1, 2005, to July 16, 2005;
walk-in contacts, which includes returns prepared at volunteer sites, for
the time period December 26, 2004, to April 23, 2005; and Internet
downloads for the time period October 1, 2004, to August 31, 2005. We used
different dates for the various areas because those dates best reflect
IRS's filing season workload in that area.

IRS's Processing Performance Continued to Improve, and, for the First
Time, More Returns Were Filed Electronically Than by Paper

IRS's performance measures show that IRS has improved its performance
processing individual income tax returns and nearly met or exceeded most
of its 2005 goals. The continued growth in the number of tax returns filed
electronically resulted in more than half of all individual income tax
returns being filed electronically for the first time. Despite the
continued growth, IRS is not on track to meet its 80 percent long-term
electronic filing goal. Electronic filing mandates imposed by several
states on tax practitioners who meet certain criteria have increased
electronic filing of federal individual income tax returns. However,
stakeholders have noted information is lacking on the costs and burdens of
mandating electronic filing.

Most Measures Showed that IRS Continued to Improve Its Processing
Performance

As of September 16, 2005, IRS processed about 130 million individual tax
returns, including 68 million returns electronically, with no significant
disruptions and issued 99 million refunds in a timely manner.^9

According to IRS data, IRS equaled or exceeded its 2004 performance and
nearly met or exceeded its 2005 goals for the following seven measures
(see app. 1 for further details).  ^10

oDeposit error rate: the percentage of payments applied in error.

oDeposit timeliness, paper: the amount of interest forgone by not
depositing payments the business day after receipt.

oLetter error rate: the percentage of letters issued to taxpayers with
errors.

oNotice error rate: the percentage of incorrect notices issued to
taxpayers.

oRefund error rate, individual: the percentage of refunds with IRS-caused
errors in the entity information (e.g., incorrect name or Social Security
number).

oRefund timeliness, paper: the percentage of refunds issued within 40 days
or less for individual tax returns filed on paper.

oProductivity: the weighted volume of work processed per staff year.

For one measure IRS's performance declined and the 2005 goal was not met.

oRefund interest paid rate: the interest paid per $1 million of refunds
issued late.

One measure was new for 2005, and IRS met the goal.

oIndividual Master File efficiency: the number of tax returns processed
per staff year.

Although IRS's performance measures indicate smooth processing and
improved performance, we have previously recommended that IRS adopt
others. Specifically, we recommended that IRS adopt a refund timeliness
performance measure for individual tax returns filed electronically to
promote growth in electronic filing.^11 This measure could help IRS better
monitor and evaluate electronic filing performance and determine the
impact of initiatives intended to increase electronic filing. However, IRS
does not plan to implement such a measure, stating it would not enhance
performance and, in fact, might be counterproductive if disappointed
taxpayers who had to wait longer than expected to receive their refunds
were to call or seek face-to-face assistance. Although not publicly
reported, IRS data shows that refunds associated with returns filed
electronically are received in about half the time as those filed on
paper. IRS publications also inform taxpayers that they can receive their
tax refund in 10 days if they file electronically if they use direct
deposit.

The number and costs of refund anticipation loans (RAL) are evidence that
taxpayers might benefit from having more information about the time it
takes to get refunds. RALs are very short-term loans issued while
taxpayers wait for their refunds. In a previous testimony, we found
examples of interest rates on RALs of well over 100 percent.^12 The
measure could be designed to minimize the problem of disappointed
taxpayers calling IRS by, for example, reporting the number of days within
which 90 percent of refunds are issued.

For the first time, IRS used the Customer Account Data Engine (CADE)^13 to
process the simplest taxpayer returns, that is, 1040EZs. CADE is important
because it is the foundation of IRS's modernization effort and will
ultimately replace the Individual Master File, which currently houses
taxpayer data for individual filers, with new technology, applications,
and relational databases. As of August 2005, CADE processed over 1.4
million returns with no significant problems, handled $424 million in
refunds, and shortened the average turnaround for refunds from 7 days to
3.5 days. A recent TIGTA report noted that information from tax returns
was accurate and posted on time to CADE accounts.^14 IRS released the next
update to CADE in mid-September 2005; another release is scheduled for
January 2006 and is on schedule, according to an IRS division chief.^15

IRS officials attribute this year's smooth processing to adequate planning
and relatively few tax law changes. Tax practitioners, who last year
prepared approximately 60 percent of all individual income tax returns,
agreed that the processing of individual tax returns has gone smoothly
during the 2005 filing season. Representatives from the National
Association of Enrolled Agents, National Society of Certified Public
Accountants, and other tax-related organizations had positive comments
about IRS's processing of individual tax returns. Similarly, TIGTA
officials told us that IRS generally processed individual tax returns
smoothly in 2005.

For the First Time, More Than Half of All Individual Tax Returns Were
Filed Electronically

Electronic filing remains important to IRS because electronic returns cost
less to process than paper returns. While obtaining accurate cost
estimates may be problematic given inadequacies in IRS's financial
accounting system,^16 IRS estimates it saves $2.15 on every individual tax
return that is processed electronically. According to IRS data, electronic
filing has allowed IRS to use about 300 fewer staff years to process paper
returns in 2005 than in 2004, which is reflected in budget savings for
processing. This is in addition to about 1,000 staff years saved between
2002 and 2003. IRS anticipates additional staff-year savings when paper
processing is eliminated in the Submission Processing Center in Memphis,
Tennessee, after the 2005 filing season.

This is the first year that more than half of the 130 million returns
filed were filed electronically. The number of individual tax returns
filed electronically increased by about 11 percent, to an estimated 67.9
million electronic individual tax returns as of September 16, 2005. IRS is
forecasting about a 9 percent increase in the number of individual income
tax returns filed electronically in 2006.

Figure 3: Number of Individual Returns and IRS Staff Years for Individual
Paper and Electronic Processing, Fiscal Years 1999 through 2006

^aFiscal years 2005 and 2006 are IRS projections and, given the current
lower electronic filing growth rates, the estimates may be optimistic.

Note: Staff years and FTEs are units of measurement that are often used
interchangeably. According to IRS, an FTE is the equivalent of one person
working full-time for 1 year with no overtime. A staff year includes
overtime. Therefore, the cost of 1 staff year is equal to the cost of 1
FTE plus overtime. As noted in the figure, staff years for paper filing
are for selected major activities only.

IRS Has Taken Actions to Encourage Electronic Filing but Will Not Meet
Long-term Goal

Over the years, IRS has taken numerous actions to encourage electronic
filing by taxpayers and tax practitioners, including

omaking electronic filing free to most taxpayers via the Free File
Alliance program^17 on the IRS Web site;

omaking the process totally paperless if a taxpayer uses a personal
identification number to sign their tax return;

omaking over 99 percent of all individual tax forms suitable for
electronic filing;

oallowing electronic payment of balance due payments; and

osurveying taxpayers and tax practitioners in response to a recommendation
in our 2001 filing season report^18 to determine why 40 million tax
returns were prepared on a computer but filed on paper.

For the 2005 filing season, IRS took the following actions to encourage
taxpayers and tax practitioners to file electronically. IRS

ocontacted about 4,600 tax practitioners who prepared tax returns on
computers but then filed paper tax returns and encouraged them to file tax
returns electronically. IRS estimates that these types of practitioners
file over 15 million paper tax returns annually;

oaccepted e-filed returns from married taxpayers filing separately who
reside in community property states; and

omade four more forms available for electronic filing.

Despite these actions, IRS is not on track to  achieve its long-term goal
of having 80 percent of all individual income tax returns filed
electronically by 2007. IRS officials do not want to abandon the goal
because it serves as a symbol of IRS's determination to increase
electronic filing. As we have previously reported, IRS's progress toward
the goal has required enhancement of its technology, development of
software to support
electronic filing, education of taxpayers and practitioners, and other
steps that could not be completed in a short time frame.^19

To achieve its long-term goal, however, IRS would have to average about a
26 percent growth rate over the next 2 years. Assuming a continuation of
the current growth rates of 11.08 percent for individual tax returns filed
electronically and 1.18 percent for the total number of individual tax
returns filed, IRS would receive an estimated 63 percent of all individual
income tax returns filed electronically in 2007. This would leave IRS
about 23 million short of the approximately 107 million individual income
tax returns that would need to be filed electronically to meet the goal.
We estimate that if IRS could close this gap, it could save about $49
million in processing costs.^20

IRS, the Electronic Tax Administration Advisory Committee (ETAAC),^21 and
GAO^22 do not expect IRS to maintain this year's rate of growth. IRS is
predicting declining growth rates in 2006 and 2007, and in 2003, ETAAC
concurred with IRS's prediction. IRS officials stated that, to achieve its
electronic filing goal, tax practitioners and taxpayers who prepare about
40 million tax returns on computers but file paper returns would have to
convert to filing electronically; however, IRS's efforts have not resulted
in converting a large portion of these filers from paper to electronic
filing.

State Mandates Have Encouraged Electronic Filing of Federal Tax Returns

Electronic filing mandates imposed by several states on tax practitioners
who meet certain criteria, such as filing 100 state tax returns or more,
have increased electronic filing of federal individual income tax returns.
According to IRS, the growth rate in 2004 of federal tax returns filed
electronically was greater than expected, because five states, including
California, mandated electronic filing of state tax returns prepared by
qualified tax practitioners who filed a certain number of state returns.
In 2005, three more states mandated electronic filing of state tax returns
prepared by qualified tax practitioners. These state  mandates have
contributed to an increase in electronic filing of not only state tax
returns, but of federal individual tax returns as well. According to IRS
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. In total, the eight states
with electronic filing mandates added an estimated 5.6 million additional
electronically-filed federal income tax returns over the 2 years. For
2006, several additional states, including New York, are mandating
electronic filing for state returns for some tax practitioners.

In its 2004 report to Congress, ETAAC stated that federal electronic
filing growth may now be entirely dependent on what states are doing,
rather than actions taken by IRS. IRS cannot require states to mandate
electronic filing. However, IRS continually informs states of the benefits
of electronic filing in hopes that more states will institute mandates.

The growing use of mandates by the states could lead to more discussion of
mandates at the federal level. In the past, ETAAC has recommended that
Congress should support mandated electronic filing by tax practitioners
because in ETAAC's view, electronic filing mandates are key to IRS
achieving its 80 percent goal.

IRS knows more about the benefits of mandated electronic filing than it
knows about the costs. The benefits are reduced processing costs to IRS,
and faster issuance of refunds to taxpayers. As already discussed, IRS has
an estimate of how much it saves on each electronic return. However, in
2005, ETAAC noted that decision makers lack information on the costs and
burdens of electronic filing. The costs are borne largely by tax
practitioners and taxpayers. In the past, tax practitioners have
complained about the costs and burdens associated with converting their
businesses to electronic filing, although benefits have also been
reported, once the businesses converted. Knowing more about the nature and
magnitude of these costs could provide fact-based information that could
help inform any future debate about making electronic filing mandatory for
certain categories of tax practitioners or taxpayers. ETAAC believes that
IRS is well positioned to gather such information.

IRS Reduced Access to Telephone Assistors, but Accuracy of Tax Law and
Account Responses Significantly Improved

IRS made a strategic decision to reduce access to its telephone service to
accommodate a budget reduction because IRS officials viewed it as flexible
area for absorbing such reductions without significantly affecting
taxpayer service. As a result, the average time taxpayers waited for CSRs
increased and more taxpayers hung up without receiving service than last
year. In contrast, the accuracy of CSR answers to millions of tax law and
account questions significantly improved compared to past performance.

IRS Reduced Access to Telephone Assistors

IRS received 72 million calls on its toll-free telephone lines through
mid-July 2005. Over a third of those calls--31 million--were from callers
trying to obtain information on the status of their tax refunds. Another
16 and 20 million calls were about tax law or taxpayer account questions
respectively. The rest were miscellaneous calls.

Figure 4 shows how IRS handled those calls. Toll-free telephone calls from
taxpayers typically are routed through IRS's telephone system based on
taxpayers' response to prompts and are then answered by CSRs or by
automated recordings. IRS's automated service handled 24 million calls and
CSRs handled 23 million. The remaining 26 million 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 2005
Filing Season

Note: Data cover the period January 1, 2005, through July 16, 2005.
Numbers do not add to the total and percentages do not add to 100 due to
rounding.

IRS devotes significant resources to providing access to CSRs. Since 2001,
IRS has devoted at least 8,300 staff years per year to telephone service.
IRS estimates that it will use 8,561 staff years to answer telephone calls
in 2005, primarily during the filing season.

According to IRS officials, IRS made a strategic decision to reduce its
CSR level of service goal from 85 to 82 percent to accommodate a budget
reduction of about $5 million. (see app. II). In response, IRS reduced the
number of FTEs devoted to phone service by less than 1 percent, resulting
in taxpayers having less access to CSRs. Also, due to a lower call volume
than last year, as of July 16, IRS had used 7 percent fewer FTEs than
planned for to answer telephones.

IRS officials chose to reduce telephone access because they viewed it as a
more flexible area to absorb budget reductions than, for example,
processing. IRS officials said that telephone access had improved in
recent years to a more acceptable level, giving IRS flexibility to adjust
CSR level of service. As a result of IRS reducing access to its telephone
assistors, the average time taxpayers waited for CSRs (average speed of
answer) increased, and more taxpayers hung up (abandoned rate) as shown in
table 1.

Table 1: IRS Telephone Assistors Accessibility Performance, 2001-2005
Filing Seasons

                                        

     Accessibility measures^a     2001   2002   2003   2004   2005    Fiscal  
                                Actual Actual Actual Actual Actual year 2005  
                                                                       goals  
CSR level of service^b          66%    69%    87%    86%    82%       82%  
Average speed of answer (in     5.7    4.5    2.8    2.8    4.4       2.8  
minutes) ^c                                                                
Abandoned rate                16.1%  14.3%   8.3%   8.4%  12.2%       n/a  

Source: GAO analysis of IRS data.

^aBased on actual counts from January through mid-July for 2001, 2002,
2003, 2004, and 2005.

^bThe percentage of callers who want to speak to a CSR who get through and
receive service.

^cAverage number of minutes 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, as a result, are different than what we reported in the past
(see GAO-04-84).

IRS officials told us that these declines are acceptable and IRS is
effectively managing its resources while still providing a high level of
service. According to the IRS Oversight Board's 2004 Taxpayer Attitude
Survey, most taxpayers are willing to wait an average of 11 minutes to
speak to a CSR. On the other hand, table 1 shows that taxpayers abandoned
more calls in 2005 when the average speed of answer increased. According
to IRS officials, there are no government or industry standard definitions
for telephone measures, such as for average speed of answer. IRS is part
of a new government wide group organized to baseline, research, benchmark,
standardize, and implement a minimum set of expectations for agencies with
telephone operations so that agencies can be measured and compared against
an objective standard to demonstrate success and improvement.

Some taxpayers who hang up may not be receiving poor service. Preliminary
results from IRS analyses of callers who hung up show some taxpayers hang
up after hearing the prompt to visit IRS's Web site. Rather than wait for
a CSR, these taxpayers may have switched to IRS's Web site to get the
information they needed. Midway through the 2005 filing season, IRS began
collecting detailed data on why taxpayers hang up. According to IRS
officials, they will continue to collect and analyze the hang-up data to
further determine when and why taxpayers are hanging up.

This year represents the first time since 1998 that IRS reduced its annual
level of service goal. However, it is difficult to assess what this year's
decline means in the longer term because IRS does not have long-term goals
for taxpayer service. A long-term CSR level of service goal may help
Congress and other stakeholders understand whether this year's reversal of
telephone access is the beginning of a trend. As will be discussed in a
later section, we recognize that setting a long-term goal for telephone
service would depend on assumptions about available resources, but that is
part of the value of long-term goals. They help clarify the trade-off
between service and other priorities.

Accuracy of Responses to Telephone Inquiries Improved

As table 2 shows, compared to goals and past performance, the accuracy of
CSR responses to tax law and account questions significantly improved.
First, IRS officials attributed the improved tax law accuracy rate
primarily to changes in the Probe & Response (P&R) Guide, a publication
that CSRs use to help answer tax law questions. In the last 2 years, IRS
blamed problems with the P&R Guide for declines in accuracy. Unlike
previous years, IRS tested this year's changes before disseminating the
guide to CSRs.

Second, with respect to the accuracy of accounts inquiries, IRS officials
stated that IRS improved the rate and exceeded the goal because of an
improved quality review process, which, in their view, gives employees a
heightened sense of their contribution to the agency's mission. Part of
that review process is Contact Recording, a system for recording all
contacts between taxpayers and CSRs including, for some calls, the
computer screen displays used by CSRs. Managers can then review the
contacts in their entirety. IRS officials told us that Contact Recording
has resulted in employees receiving more constructive feedback and more
efficient and consistent scoring of performance and quality by managers,
which likely has improved both tax law and accounts accuracy. One IRS
manager we spoke with stated that she liked the system because it allows
managers to listen to the prerecorded contact at their convenience, and
therefore provide more complete feedback to employees. Furthermore, she
said that Contact Recording is more efficient than the method used before,
wherein managers listened to selected calls in "real time" and provided
CSRs feedback based on what the managers heard during the call.

As noted in our 2004 filing season report, IRS decided to implement
Contact Recording at all call sites by the end of the 2005 filing season.
IRS was slightly behind schedule on implementing this system by the end of
this year's filing season.

Table 2: IRS Telephone Assistors Accuracy Performance, 2001-2005 Filing
Seasons

                                        

       Accuracy         2001     2002     2003     2004     2005 Fiscal year  
      measures^a               Actual                     Actual  2005 goals  
                      Actual            Actual   Actual                       
Tax law accuracy    79.1%    84.9%    81.3%    79.5%    89.5%       82.0%  
rate^b                                                                     
                     +/- 0.6 +/- 0.5% +/- 0.7% +/- 0.8% +/- 0.6%              
Accounts accuracy   88.1%    90.5%    88.6%    89.0%    91.3%       89.8% 
rate^b                                                                    
                     +/- 0.6 +/- 0.4% +/- 0.4% +/- 0.5% +/- 0.4%             

Source: GAO analysis of IRS data.

^aBased on representative samples from January through June for 2001,
2002, 2003, 2004, and 2005.  ^bThe 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.

IRS Has Efforts Intended to Improve Its Telephone Services

IRS had two efforts intended to improve telephone services for the 2005
filing season. First, IRS continued to implement Contact Recording, as
previously discussed. Second, in an effort to streamline the process for
managing its telephone workforce, and in turn save FTEs, IRS began to
implement the Centralized Contact Center Forecasting and Scheduling
project in 2005. The project is designed to assess IRS's current telephone
workforce management efforts and determine the most appropriate and
efficient solution for managing that workforce. IRS has held initial
meetings to solicit team members and define high-level requirements for
the project. IRS has a project plan in place and is on schedule to meets
its deadlines for this project.

Fewer Taxpayers Used IRS Walk-in Sites and More Used Volunteer Sites, but
IRS Lacks Reliable Quality and Other Data

Past trends have continued as fewer taxpayers used IRS's walk-in services
and more used volunteer tax return preparation services. These trends are
consistent with IRS's strategy to direct taxpayers away from face-to-face
assistance provided by its employees to less costly alternatives. However,
IRS lacks reliable data on quality that could be used to compare the two
services and understand the impact of IRS's strategy on taxpayers. IRS
initiated quality improvement programs for both services intended to
improve data reliability, but these programs have yet to produce
sufficiently reliable data.

Fewer Taxpayers Used IRS Walk-in Sites for Return Preparation and Other
Types of Assistance, but Quality Data Are Not Reliable

Fewer taxpayers used IRS's approximately 400 walk-in sites during the 2005
filing season, continuing a trend since 2001. At these sites, IRS
employees provide taxpayers with information about their tax accounts,
answer a limited scope of tax law questions,^23 and prepare returns if the
taxpayer's annual gross income is $36,000 or less. As reflected in figure
5, the total number of walk-in taxpayer contacts during the 2005 filing
season declined by nearly 385,000 (10 percent) from last year.^24 Contacts
for return preparation declined by almost 68,000 (22 percent) during the
same period.

Figure 5: Assistance Provided by IRS Walk-in Sites, 2001-2005 Filing
Seasons

Note: "Other walk-in contacts" includes assistance for account notices,
tax law inquiries, forms, and compliance work, but not return preparation.
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; December 28, 2003, through April 24, 2004; and December
26, 2004, through April 23, 2005.

The declines in walk-in usage were consistent with IRS's strategy of
reducing costly face-to-face assistance in favor of other service options
such as the telephone and Web site.^25 While some of the decline in return
assistance is likely due to taxpayers taking advantage of other
increasingly available and attractive alternatives, like the improved Web
site, some of it is attributable to IRS's attempt to direct taxpayers away
from face-to-face assistance. For example, since 2003, IRS has required
appointments for most taxpayers seeking return preparation service at its
sites.  ^26

As we have previously reported,^27 this decline and the shift of taxpayers
from walk-in sites to other service options is important because it has
allowed IRS to transfer time-consuming services, such as return
preparation, from IRS to other less costly alternatives that can be more
convenient for taxpayers. As a result, IRS devoted fewer resources--as
represented by direct FTEs^28--to providing return preparation and other
services during the 2005 filing season. As reflected in figure 6, IRS
reduced the number of direct FTEs devoted to walk-in sites during the
filing season by over 4 percent overall and by 22 percent for return
assistance from the same period last year.

Figure 6: Direct FTEs Used for Assistance Provided by IRS Walk-in Sites,
2001-2005 Filing Seasons

Note: 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; December 28, 2003, through April 24, 2004; and December
26, 2004, through April 23, 2005.

In previous years, IRS transferred enforcement staff to walk-in sites to
help staff handle the workload that occurs during the filing season. IRS
has nearly eliminated this practice, which pulled the staff away from
performing enforcement work, and instead hired more full-time staff to
cover the workload during the filing season.

To prevent the newly expanded walk-in staff from experiencing downtime
after the filing season, when the workload drops off, since fiscal year
2004, IRS began having walk-in staff perform some collections work after
the
filing season.^29 For example, between October and July 2005, IRS used 53
of its 602 total direct FTEs (9 percent) to handle this collections work.
According to IRS officials, this has provided sufficient work to keep
walk-in staff productive all year and greatly reduced dependence on
enforcement staff. Besides regulating the filing season workload, IRS
officials stated that handling these individual taxpayer collection cases
at walk-in sites could help them address overdue collections that, in
their view, may be overlooked by the normal collections process.

Some IRS officials question moving collections work out of the normal
collection process because IRS lacks information about the effectiveness
of conducting such work using walk-in site staff. According to IRS
officials, IRS will have a reporting system in January 2006 that will
allow it to analyze the results of that work and compare it to normal
collection results to determine the most effective place to do the work.
IRS is on schedule for implementing this system, according to IRS
officials. Furthermore, IRS is reevaluating the services provided at
walk-in sites, including collections work.

IRS lacks reliable and comprehensive data on the quality of the services
provided at walk-in sites. In 2004, IRS began implementing a program to
collect data on the quality of services provided to taxpayers at walk-in
sites, and we noted concerns with the reliability of the data due to the
collection method.^30 Under this program, managers directly observe a
sample of employee interactions with taxpayers. We were concerned that
employees' performance could be influenced by the knowledge that they are
being observed by managers, biasing the sample results. Also, IRS found
that managers were not consistently coding employee performance. As a
result, we^32 have stated that the quality review program ^31 and
TIGTAused to monitor walk-in sites does not provide reliable data and made
recommendations intended to improve quality measurement.

To obtain reliable and comprehensive data on the quality of services
provided, IRS is implementing Contact Recording at walk-in sites, which is
similar to the method used for IRS's telephone service, whereby IRS
employee and taxpayer interactions will be recorded and reviewed later by
managers.^33 IRS piloted Contact Recording at a small number of walk-in
sites, ending in July 2005, and decided to continue implementation.

The results of the Contact Recording pilot and the current direct
observation method are quite different. According to IRS officials,
Contact Recording results showed quality to be significantly worse than
the results from the direct observation method.^34 However, IRS is not
scheduled to fully implement Contact Recording at walk-in sites until
December 2007. Until that occurs, IRS will lack reliable and comprehensive
data. While IRS appears to be on schedule based on its implementation plan
for Contact Recording, it has previously experienced delays implementing
other parts of its quality review program. In fact, in a previous report
we made a recommendation to help ensure that IRS addresses the causes of
past delays in implementing its quality program at walk-in sites.^35

For 2006, IRS asked TIGTA to assess the accuracy of tax law assistance,
one service offered at walk-in sites. The results of TIGTA's requested
assessment of tax law assistance would be unreliable because sites they
covered would be selected judgmentally and the results could not be
projected to all sites. Also, IRS will continue to lack data on the other
services it provides, namely account assistance and return preparation.

In addition to the lack of reliable data on quality, IRS lacks complete
data on what kind of services these sites should offer. As TIGTA^36 and
the National Taxpayer Advocate^37 have noted, IRS lacks accurate and
complete management information on walk-in sites. For example, TIGTA
reported that (1) IRS has limited information on the exact numbers and
types of services provided at IRS's walk-in sites as well as information
on what kind of face-to-face service taxpayers need or want and (2) the
lack of information hinders IRS's ability to make appropriate decisions
about the locations and services it provides taxpayers. Consequently,
TIGTA made recommendations to IRS to enhance the validity and reliability
of information on taxpayer needs and ensure that the services provided
effectively and efficiently address these needs.

More Taxpayers Sought Return Preparation Assistance from Volunteer Sites,
but Quality Data Are Not Reliable

In contrast to IRS's walk-in sites, the numbers of taxpayers seeking
return preparation assistance at about 14,000 volunteer sites increased by
nearly 13 percent from last year (see fig. 7). Again, this increase is
consistent with IRS's strategy to direct taxpayers away from face-to-face
IRS assistance to volunteer sites.

Figure 7: Assistance Provided by Volunteer Sites, 2001-2005 Filing Seasons

Note: The time periods covered are January 1, 2001, through April 21,
2001; December 30, 2001, through April 27, 2002; December 29, 2002,
through April 26, 2003; December 28, 2003, through April 24, 2004; and
December 26, 2004, through April 23, 2005. IRS does not collect data on
the number of contacts at volunteer sites.

As with its walk-in sites, IRS lacks reliable data on the quality of
services provided at volunteer sites. Ensuring quality service at
volunteer sites is important because not only does IRS provide assistance
to volunteer sites, but IRS actively promotes volunteer sites as an
alternative for face-to-face services at its walk-in sites. Furthermore,
we^39 have reported ^38 and TIGTAconcerns about the quality of return
preparation assistance provided at volunteer sites and have made
recommendations to remedy the concerns, some of which date back to
2000.^40 More recently, a TIGTA official told us that that while
improvements have been made at volunteer sites, continued effort is needed
to ensure the accuracy of services provided.

IRS recognized the data quality problems and proposed a strategy to
address them, but there is still insufficient data to determine the
quality of services provided. As part of IRS's strategy for improving
quality at volunteer sites, it developed three methods to monitor quality
during the 2005 filing season--observation reviews, site reviews, and
mystery shopping.^41 However, IRS halted its use of observation reviews
immediately after starting due to concerns raised by the National Taxpayer
Advocate and some partner organizations that observation reviews violate
taxpayer privacy and unfairly target low-income taxpayers. IRS maintained
its two other methods, but according to IRS officials, neither of these
methods are as comprehensive as the observation method in following the
process volunteers used to prepare returns, such as appropriate probing
techniques to acquire dependency information from taxpayers. Furthermore,
IRS conducted only 14 of the proposed 100 mystery shopping visits, which
did not provide sufficient results. As a result, the methods used to
collect data on quality at volunteer sites were inadequate for monitoring
and evaluating quality at volunteer sites in 2005.

IRS has proposed conducting return reviews instead of observational
reviews for the 2006 filing season.^42 During each site review, IRS
officials plan to select three tax returns to examine by comparing a
taxpayer's return against their supporting tax-related documents, as well
as other information obtained by the volunteers, to determine the accuracy
of the return. According to IRS officials, IRS has consulted with several
partner groups participating in the volunteer program about the return
reviews. The partners did not express the same concerns with return
reviews as those they had with observation reviews.

IRS intends to use return reviews, along with site and mystery shopping
reviews, in an implementation plan for the 2006 filing season as part of
its strategy to monitor and evaluate quality of return preparation at
volunteer sites. According to IRS officials, the plan is on schedule for
critical events, such as developing publications and training. For
example, IRS officials told us that they were working to avoid the
logistical problems of last year that resulted in fewer than the
anticipated number of mystery shopping reviews.

Web Site Performed Well, Was Highly Rated, and Used Extensively

IRS's Web site is important because it provides taxpayers and tax
practitioners with assistance without having to contact IRS employees and
results in IRS saving resources. Our review and external Web site ratings
of IRS's Web site and various other data indicates that it performed well,
was user friendly, and was used extensively. This is consistent with IRS's
strategy to improve taxpayer service by providing options for automated
interaction with the IRS, such as "Where's My Refund."

Web Site Performed Well and Was User Friendly

IRS's Web site was user friendly, based on our testing for the types of
information taxpayers look for when accessing the Web site. Specifically,
our testing found it (1) was accessible and easy to navigate, (2) had no
broken links, (3) did not have outdated or inconsistent data, (4) had
facts and information logically arranged and easy to obtain, (5) had a
search function that worked well, and (6) had a quick response time.

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

oKeynote, an independent Web site rater of Internet performance that does
a weekly study during the filing season, reported that IRS's Web site
performed very well. For example, it was ranked in the top 4 out of 40
government Web sites and users were able to access the IRS Web site in
less than 1 second during the entire filing season. The same independent
weekly assessment reported that IRS ranked first or second in response
time for downloading data.

oBrown University's Taubman Center for Public Policy rated IRS's Web site
among the upper half of 61 federal government Web sites in providing
service to citizens.

Taxpayers can ask IRS tax law questions via the agency's Electronic Tax
Law Assistance (ETLA) program on its Web site. The substantial increase in
IRS's performance for the ETLA program this year is due to the fact that
IRS received significantly fewer questions than last year, which allowed
it to improve its timeliness and accuracy in responding to those
questions.  IRS received fewer questions because it kept the ETLA function
at the same, less prominent location on the Web site that it was moved to
last year. As we reported last year, IRS moved the ETLA function on its
Web site to a less prominent location in the middle of the filing season
last year.^43 According to IRS officials, this significant increase in
performance is because the number of questions being submitted declined
from about 64,200 last filing season to 18,700 this filing season. As a
result, the average time to respond to questions is down from 3 days last
filing season to 1.2 days in the 2005 filing season and the accuracy rate
in responding to questions has improved from 64 percent last year to 86
percent this filing season.

IRS intended to discontinue this program for the 2006 filing season for
taxpayers residing in the United States because questions can be answered
more efficiently if handled via the telephone. However, due to
congressional concerns, IRS now plans to keep the program.

Web Site Was Used Extensively

IRS's Web site experienced extensive use this filing season based on the
number of visits to the Web site, pages viewed, and forms and publications
downloaded. As of August 31, 2005, the Web site had been visited about 169
million times and users viewed about 1.2 billion pages. This year is the
first year that IRS is publicly reporting these figures. Further, as of
August 31, 2005, about 150 million forms and publications had been
downloaded via the IRS Web site.

IRS's Web site continues to provide two very important tax service
features that were used extensively by taxpayers: (1) "Where's My Refund"
enables taxpayers to check on the status of their refund and for the first
time this year allows a taxpayer whose refund was returned as
undeliverable mail to change their address and (2) Free File provides
taxpayers the ability to file their tax return electronically for free. As
of August 31, 2005, 28.5 million taxpayers had accessed the "Where's My
Refund" feature, about a 24 percent increase over the same time period
last year. As of September 16, 2005, over 5 million tax returns had been
filed via Free File, which represents a 46.2 percent increase over the
same time period last year. For the first time this year, all individual
taxpayers were eligible to file for free via IRS's Web site. The
performance of IRS's Web site is consistent with IRS's strategy to improve
taxpayer service by providing options for automated interaction with IRS.

IRS Is Developing Long-term Goals for Taxpayer Service, but Completion
Date Is Unknown

IRS currently lacks, but is developing, long-term goals for taxpayer
services, tax enforcement, and modernization. We have reported on lack of
such goals in past reports in each of these three areas.^44 Similarly, a
2004 Program Assessment Rating Tool (PART)^45 review conducted by the
Office of Management and Budget found that IRS lacks long-term goals, not
just for filing season activities, but for all aspects of its operations.
PART asks, for example, whether a program's long-term goals are specific,
ambitious, and focused on outcomes, and found that IRS did not meet the
criteria.

IRS has been working to establish long-term goals as part of its strategic
planning efforts for all aspects of its operations for well over a year.
However, at this time IRS does not have a schedule for finalizing its
long-term goals.

According to federal law and good management practices, as part of its
strategic planning, a executive agency should not only have annual
performance goals for each program, but these annual goals should be
linked to long-term goals that set longer term and broader expectations
for how an agency should be accomplishing its mission. While these
long-term goals do not necessarily need to be quantifiable, they should be
sufficiently focused on results or outcomes to provide the agency's
management and Congress with information not only prospectively--i.e., how
well the agency expects to perform, but retrospectively as well--i.e., how
close actual performance is to expectations. This information holds
agencies accountable and helps agencies and Congress make strategic
trade-offs. Long-term goals can help

oan agency meet its goals by setting targets and providing incentives to
meet them;

odetermine whether annual goals contribute to long-term progress;

oidentify gaps in performance or misaligned priorities;

oconsider new strategies to improve service in the future, especially
since these strategies could take several years to implement; and

oprovide a framework for assessing budgetary trade-offs--for example, for
IRS, between taxpayer service and enforcement on an annual basis and over
the longer term.

Long-term goals are a component of the statutory strategic planning and
management framework that Congress adopted in the Government Performance
and Results Act of 1993^46 (GPRA). GPRA requires executive agencies to
develop a strategic plan with long-term, results- or outcome-oriented
goals and objectives for all major functions and operations. Furthermore,
each long-term goal must be linked to annual performance goals, which
should be quantifiable, i.e., should indicate whether or not incremental
progress is being made toward the long-term goal.

IRS has taken some steps toward meeting GPRA's criteria for strategic
planning. IRS has established a strategic plan and associated strategic
and annual performance goals. The strategic goals, which are qualitative
and descriptive, are long-term goals in the sense that they represent
IRS's vision for the next 5 years. IRS's Strategic Plan for fiscal years
2005-2009 describes IRS's three strategic goals for 5 years hence: (1)
improve taxpayer service, (2) enhance enforcement of tax laws, and (3)
modernize IRS through its people, processes, and technology. The plan
includes strategies and means for achieving the strategic goals, such as
reducing face-to-face assistance and increasing less expensive ways of
interacting, i.e., electronic interactions such as IRS's Web site.

IRS's strategic goals, however, lack specific targets against which
progress can be measured. More specifically, IRS's strategic goals do not
spell out where IRS wants to be in the future with respect to levels of
taxpayer service or enforcement. In contrast, IRS has one long-term
goal--for electronic filing--which is quantitative. Because it is
specific, it is useful for identifying gaps between actual and intended
performance and measuring progress toward the goal.

We recognize that developing long-term goals that meet the above criteria
is difficult. Not all goals may be as easily quantified as the goal for
electronic filing. Because of the difficulty, IRS has experienced delays
in finalizing its proposed goals. In our April 2005 testimony,^47 we
stated IRS reported that the goals would be finalized and publicized
before May 2005. However, as of October 2005, IRS lacked a schedule for
the public release of long-term goals.

If long-term goals are not in place in a timely manner in 2006, Congress
and IRS management will be less informed about budgetary trade-offs
between improving taxpayer service and enhancing enforcement. Such
trade-offs, as we have noted before, involve risk. One risk is
surrendering some of the gains that have been made in taxpayer service.

IRS Has Taken Numerous Actions to Deal with the Aftermath of Hurricanes
Katrina and Rita, but Implications for the 2006 Filing Season Are Not Yet
Known

IRS has taken numerous actions to address the aftermath of Hurricanes
Katrina and Rita, including assessing employee and infrastructure needs,
providing tax relief, and providing assistance to federal partners. IRS
officials report that any effect on this year's filing season performance
was slight because the hurricanes occurred so late in the filing season.
IRS is also assessing the longer term implications of the hurricanes for
the 2006 filing season and beyond.

According to IRS officials, IRS followed mandated procedures, which focus
on the impact to employees, critical business processes, and computer
systems. IRS established an Emergency Command Center in Nashville,
Tennessee, to deal with immediate issues in the field related to employee
safety and assistance, damage to facilities and equipment, and security of
taxpayer data and other IRS records. The center maintained ongoing
communications with the highest levels of IRS management, including the
two deputy commissioners, providing daily reports on the impact of the
disaster and recovery process. IRS planned to close the center by
mid-September 2005. IRS located and contacted all 517 employees in the
affected areas. Many have returned to work at sites that have been
reopened or alternative locations.

A vital part of IRS's response to any disaster is its support of other
federal agencies and stakeholders. IRS worked with the Federal Emergency
Management Agency (FEMA) and the General Services Administration to
inspect the buildings, determine if and when those facilities would be
operational, and obtain replacement space for the offices closed
indefinitely. IRS reopened offices in all but two locations (Gulfport,
Mississippi, and New Orleans, Louisiana) in September and plans to
reestablish workload inventories at those offices. IRS plans to reopen
offices in Gulfport and New Orleans after November 4, 2005. Finally, IRS
had four offices closed as a result of Hurricane Rita, all of which were
reopened by the end of October 2005.

In response to Hurricane Katrina, IRS has assigned employees to work in
approximately 30 disaster recovery centers including in Alabama,
Mississippi, and Texas; assigned nearly 5,000 employees to augment federal
telephone call sites; and called back 4,000 seasonal employees to minimize
the disruption to ongoing IRS work.

IRS gave priority over its regular telephone service to help disaster
victims with the FEMA registration process whereby people call in and
provide IRS employees with basic information such as their name, address,
and property damage. IRS officials estimated that IRS staff may handle up
to 50 percent of these FEMA calls. As of September 18, 2005, IRS had
answered over 384,000 telephone calls for FEMA, which was about 65 percent
of all calls at the time. In a letter commenting on a draft of this
report, the Commissioner noted that as of the end of October, IRS answered
over 786,000 disaster-related calls. Besides FEMA, IRS was the only other
federal agency using its own facilities and employees to answer these
calls.

IRS's actions to safeguard taxpayer data include working with external
groups such as the Federal Protection Service and General Services
Administration to secure facilities and assess operational capability.
According to IRS officials, they are implementing the best practices
learned from Hurricane Andrew and the September 11^th attack, retrieved
archived documents, and used many of the managers and employees who were
involved in these prior events to support the current efforts.

IRS took numerous actions to provide broad relief to affected taxpayers
including postponing deadlines for filing and payment, providing relief
from interest and penalties, waiving some low-income housing tax credit
rules, waiving the usual fees and expedite requests for copies of
previously filed tax returns for affected taxpayers who need them to apply
for benefits or to file amended returns claiming casualty losses, and
encouraging widespread use of leave donation programs for disaster
victims.

IRS communicated this and other information via a series of news releases
and notices. In addition, IRS established a special toll-free disaster
number to handle taxpayer inquiries and launched a special section on its
Web site to provide information on tax relief and related issues.

IRS also coordinated with the Department of Labor to expedite filing
verifications and with the U.S. Postal Service to locate and redirect mail
to the affected area. IRS temporarily suspended correspondence and
compliance activities in the affected areas; additional guidance was
pending at the time we concluded our work. Also, IRS has partnered with
the Associated American Institute of Certified Public Accountants to
provide outreach to affected taxpayer disaster recovery centers, and has
coordinated with the Federation of Tax Administrators to provide
assistance to impacted states.

IRS also is assessing the longer term implications of Hurricanes Katrina
and Rita for the 2006 filing season and beyond, which was complicated by
the number of taxpayers involved, dispersion of those taxpayers across the
country, and unanticipated computer programming and other business changes
that need to be made in response to legislation under relatively tight
time frames. Regarding the 2006 filing season, according to IRS officials,
IRS's actions, including using seasonal employees to answer IRS calls,
should help minimize disruption to telephone service in particular while
other employees assist FEMA in answering emergency calls.

Conclusions

In recent years, IRS has significantly improved its filing season services
to taxpayers. The trend continued this year in several areas, such as
telephone accuracy. However, because of overall budget constraints and its
strategy of shifting resources from service to enforcement, IRS will be
challenged to continue improving service.

In principle, IRS could shift resources from service to enforcement while
maintaining or improving the quality of service to taxpayers if it can
provide service more efficiently. But there is risk that this strategy
could result in surrendering some of the past gains in taxpayer services.

In practice, however, IRS has been able to shift resources and realize
noticeable efficiency gains. IRS's efficiency gains can be linked, in
part, to management's focus on results, performance measurement, and in
the case of electronic filing, progress towards its long-term goal.

We identified two areas where additional information might lead to better
informed decision making about how to continue improving IRS's
performance. The first area is electronic filing. Despite numerous IRS
initiatives that have increased electronic filing, there remains
considerable room for further growth. Some states and federal tax experts
have recognized that mandatory electronic filing for certain categories of
tax practitioners is the one remaining option with the potential for
significant impact. However, mandatory electronic filing would likely
impose some costs and burdens on tax practitioners. Better information
about the nature and magnitude of these costs and burdens would provide
more facts about the pros and cons of mandatory electronic filing.

The second area is long-term goals. Without agency wide long-term goals
that are concrete and as quantifiable as possible, it is difficult to
assess IRS's progress and budget requests.

Recommendations for Executive Action

To address the problems with meeting its long-term electronic filing goal
and needing time frames for developing and publicizing long-term goals, we
recommend that the Commissioner of Internal Revenue direct the appropriate
officials to

odevelop better information about the costs to tax practitioners and
taxpayers of mandatory electronic filing of tax returns for certain
categories of tax practitioners and

oestablish a schedule for developing its long-term goals.

Agency Comments and Our Evaluation

The Commissioner of Internal Revenue provided written comments in a
November 4, 2005, letter outlining IRS's view of its 2005 filing season
performance in return processing, telephone service, walk-in service,
volunteer return preparation, and Internet services, which is reprinted in
appendix III. The Commissioner wrote that he appreciated our recognition
of IRS's successes for the 2005 filing season, which he characterized as
one of the most successful ever for IRS. He stated that IRS was able to
balance its resources to focus on both service and enforcement and provide
customer service through detailed planning, improved efficiencies, and the
dedication of IRS staff. However, he also recognized room for improvement.

The Commissioner agreed with both of the report's recommendations. In
responding to our first recommendation to develop better information about
the costs of mandatory electronic filing of returns for certain categories
of tax practitioners, the Commissioner stated that IRS would initiate a
study to analyze the relationship of state-mandated electronic filing
requirements to the federal electronic filing rate. Regarding the second
recommendation for IRS to establish a schedule for developing its
long-term goals, the Commissioner stated that IRS had initiated efforts to
develop long-term, outcome-oriented goals and would establish a schedule
for developing these goals by the end of the calendar year 2005.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we will not distribute it until 30 days from the date
of the report. At that time, we will send 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.

If you have any questions regarding this report, please contact me at
(202) 512-9110 or at [email protected]. Contacts points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this report include Emily Byrne, Evan
Gilman, John Lesser, Alan Patterson, Cheryl Peterson, Neil Pinney, Amy
Rosewarne, Joanna Stamatiades, and Daniel Zeno.

Sincerely yours,

James R. White, Director, Tax Issues Strategic Issues

Appendix I

Data on Processing Performance Relative to Fiscal Years 2001 through 2004
Performance and Fiscal Year 2005 Goals

As table 3 shows, the Internal Revenue Service (IRS) nearly met or
exceeded eight of the nine processing performance goals for 2005. For five
measures (refund timeliness, deposit error rate, letter error rate,
productivity, and efficiency), IRS exceeded its goal. For three of the
remaining measures (refund error rate, deposit timeliness, and notice
error rate), IRS nearly met or met its goal. For one measure, refund
interest paid, IRS did not meet the goal, according to IRS officials,
because of an unanticipated but substantial increase in the interest rate.

Comparing actual 2005 performance to 2004 performance shows that IRS's
performance improved or remained about the same for seven of the eight
measures, again with the exception of refund interest paid. Table 4 also
shows that IRS processing performance in 2005 has improved compared to
2002 performance for all but one of the measures that could be compared.

Table 3: IRS's Processing Performance, Fiscal Years 2001 through 2005

                                        

    Measure name       Definition     Fiscal     Fiscal     Fiscal     Fiscal   Fiscal  Fiscal 
                                        year       year       year       year     year    year 
                                                                                               
                                        2001       2002       2003       2004     2005    2005 
                                                                                actual    goal 
                                    actual^a     actual     actual     actual                  
                                                                              (through         
                                                                               July)^a         
Deposit error rate     Percentage       5.0%       4.8%       4.2%       3.5%     2.3%    3.4% 
                      of payments                                                              
                       applied in              +/-.3%^d  +/-.3% ^d +/-.31% ^d  +/-.23%         
                        error by,                                                   ^d         
                              for                                                              
                         example,                                                              
                      reimbursing                                                              
                       a taxpayer                                                              
                              who                                                              
                         overpaid                                                              
                         when the                                                              
                         taxpayer                                                              
                       wanted any                                                              
                      overpayment                                                              
                      credited to                                                              
                      next year's                                                              
                        tax bill.                                                              
Deposit                  Interest        Not        Not        Not    $407 ^e  $401 ^e    $400 
timeliness-paper      foregone by comparable comparable comparable                             
                              not because of because of because of                             
                       depositing  revisions  revisions  revisions                             
                       monies the     to the     to the     to the                             
                         business   measure.   measure.   measure.                             
                        day after                                                              
                         receipt,                                                              
                           per $1                                                              
                       million in                                                              
                        deposits.                                                              
                          Measure                                                              
                       assumes an                                                              
                        8 percent                                                              
                         interest                                                              
                            rate.                                                              
Letter error rate      Percentage        Not       7.4%       7.1%       6.6%     3.1%    5.9% 
                       of letters comparable                                                   
                        issued to because of +/- .6% ^c  +/-.5% ^c +/-.38% ^c   +/-.30         
                        taxpayers  revisions                                        ^c         
                      with errors     to the                                                   
                        (includes   measure.                                                   
                         systemic                                                              
                       errors).^a                                                              
Notice error rate      Percentage        Not      18.7%       9.4%       9.5%     8.8%    8.6% 
                               of comparable                                                   
                        incorrect because of   +/- 2.4%   +/- 1.2%   +/-1.31% +/-1.07%         
                          notices  revisions         ^c         ^c         ^c       ^c         
                        issued to     to the                                                   
                        taxpayers   measure.                                                   
                        (includes                                                              
                         systemic                                                              
                      errors). ^b                                                              
Refund error rate             The       9.8%       8.0%       5.3%       4.9%     5.1%    4.8% 
-individual (paper)    percentage                                                              
                       of refunds              +/- .46% +/-.41% ^c +/-.44% ^c  +/-.53%         
                             with                    ^c                             ^c         
                       IRS-caused                                                              
                        errors in                                                              
                       the entity                                                              
                      information                                                              
                           (e.g.,                                                              
                        incorrect                                                              
                            name,                                                              
                           Social                                                              
                         Security                                                              
                       number, or                                                              
                           refund                                                              
                         amount);                                                              
                         includes                                                              
                         systemic                                                              
                       errors. ^c                                                              
Refund interest paid    Amount of        Not        Not     $36.29     $20.55   $27.54  $19.00 
                           refund comparable comparable                                        
                         interest because of because of                                        
                         IRS paid  revisions  revisions                                        
                           per $1     to the     to the                                        
                       million of   measure.   measure.                                        
                          refunds                                                              
                          issued.                                                              
Refund                 Percentage      95.2%      98.2%      98.8%      98.3%    99.2%   98.4% 
timeliness-individual  of refunds                                                              
(paper)                    issued              +/- .32%   +/- .26%   +/- .17%  +/-.18%         
                        within 40                    ^d         ^d         ^d       ^d         
                          days or                                                              
                            less.                                                              
Productivity             Weighted     30,133     28,389     30,179     30,405   31,286  30,179 
                        volume of                                                              
                        documents                                                              
                        processed                                                              
                        per staff                                                              
                             year                                                              
                      expended at                                                              
                              the                                                              
                       processing                                                              
                         centers.                                                              
Individual             Measure of    Measure    Measure    Measure    Measure   16,172 14,878. 
                       individual     not in     not in     not in     not in                  
Master File           Master File existence. existence. existence. existence.                  
Efficiency                returns                                                              
                        processed                                                              
                        per staff                                                              
                             year                                                              
                        expended.                                                              

Note: GAO analysis of IRS data.

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

^bThe measures for fiscal year 2005 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.^cSystemic 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.

^eIRS's measure for deposit timeliness for 2004 and 2005 was not
comparable to previous years because IRS changed the formula to not
include weekends.

Appendix II

Budget Reduction Had Some Impact on Service to Taxpayers

IRS's fiscal year 2005 budget was approximately $10.2 billion which funded
approximately 96,400 full-time equivalents (FTE). The taxpayer services
accounted for about $3.6 billion (35 percent) of the entire IRS budget.
The remaining budget was used to fund various operations such as
examination, collection, investigations, and business systems
modernization.

From fiscal year 2004 through fiscal year 2005, IRS received a slight
budget reduction in taxpayer service of about $103 million (2.8 percent)
as shown in table 4.  ^1 Although IRS officials stated that the reduction
would have had minimal impact on taxpayer service during the 2005 filing
season, our analysis of IRS's performance measures showed some impact on
service, most notably in the area of telephone access. IRS also absorbed
budget reductions for its volunteer and Web site operations, with minimal
impact on taxpayer service, according to IRS officials. In both these
areas, however, officials stated that future budget reductions could have
a negative impact on taxpayer service. As discussed in the report section
on long-term goals, long-term goals could help IRS decision makers decide
how to best allocate resources during times of budget reductions.

Table 4: Overall Taxpayer Service Budget Reduction, Fiscal Years 2004 and
2005

                                        

    (Dollars in thousands)  
                             Fiscal Year      Fiscal     Change   
                                                                  
                                    2004   Year 2005      Dollars  Percentage 
Assistance                 $1,828,373  $1,829,189         $817        0.0% 
Outreach                      544,146     500,329      -43,817        -8.1 
Processing                  1,337,128   1,276,459      -60,669        -4.5 
Total                      $3,709,647  $3,605,977    $-103,670       -2.8% 

Source: GAO analysis of IRS data.

Direct Costs. About $18 million of the $103 million budget reduction shown
in table 4 was a reduction in direct costs and these reductions did have
some impact on taxpayer service, primarily telephone service.

Support Costs. Most of the $103 million reduction, about $85 million, was
in support costs. Support costs are composed of both indirect costs and
overhead costs such as rent, management, information services, legal
services, and security. According to IRS officials, while large, this
reduction did not impact taxpayer service because the services are not
directly related to the funding of IRS programs.

We examined those budget adjustments that we believed could have
significantly affected the filing season activities we review annually. We
found the following:

oTax return processing. Processing received a slight overall budget
reduction of direct funds of $7.6 million, about 1 percent, in fiscal year
2005. In particular, Submission Processing received a direct reduction of
$11 million. IRS absorbed this reduction by allowing some management
contracts to expire because they were no longer needed due to the
consolidation of paper processing operations. Additionally, the Electronic
Tax Administration, which is responsible for advertising electronic
filing, received a marketing budget reduction of approximately $7.6
million (40 percent) for the 2005 filing season. In spite of the budget
reduction, the number of tax returns filed electronically increased 11
percent from 2004. However, IRS officials are becoming increasingly
concerned about the potential impact of future reduction on their ability
to increase electronic filing.

oTelephone services.  Perhaps the most significant impact of the budget
reduction was in the area of telephone services. According to IRS
officials, IRS's telephone services received a direct budget reduction of
$5 million. As a result, taxpayers' ability to talk to a customer service
representative (CSR) was more limited than the year before, their wait
time increased, and more taxpayers hung up before speaking with a CSR.

oWalk-in & volunteer sites. IRS's budget for walk-in sites remained
stable, and due to congressional concerns, plans to close some walk-in
sites in 2006 are on hold. For its volunteer sites, IRS  shifted resources
from taxpayer service to enforcement, resulting in an overall reduction in
the Stakeholder Partnership, Education, and Communication (SPEC) budget of
about $3 million. SPEC absorbed approximately $2 million of the budget
reduction by implementing a voluntary reassignment program that allowed 28
SPEC staff, including 10 front-line managers, to transfer to enforcement
work. Although SPEC had planned to reorganize its field management
structure for the 2006 filing season as a result of changes made in 2005,
as with the walk-in sites, it no longer plans to do so. Also, IRS
officials stated that future budget reductions could impede sustainable
growth and negatively impact taxpayer service in the future because their
model of leveraging resources relies on partnerships and networking
opportunities.

oWeb site. Web Services, which oversees IRS's Web site, received an
overall budget reduction of approximately $4 million (10 percent) in 2005.
As a result, Web Services reduced some contract services. Officials
believe that because Web site use has increased annually, its budget
should grow to keep pace with the increase. However, they expressed
concern that future reductions could negatively impact the Web site's
performance.

Appendix III

Comments from the Internal Revenue Service

(450382)

www.gao.gov/cgi-bin/getrpt?GAO-06-51 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact James R. White at (202) 512-9110 or
[email protected] .

Highlights of [35]GAO-06-51 , a report to the Chairman, Subcommittee on
Oversight,

Committee on Ways and Means, House of Representatives

November 2005

TAX ADMINISTRATION

IRS Improved Some Filing Season Services, but Long-term Goals Would Help
Manage Strategic Trade-offs

During the filing season, the Internal Revenue Service (IRS) processes
about 130 million individual tax returns, issues refunds, and responds to
millions of inquiries. Budget cuts combined with IRS's strategy of
shifting resources from taxpayer service to enforcement make providing
quality service a challenge. GAO was asked to assess IRS's 2005 filing
season performance compared to past years and 2005 goals in the processing
of paper and electronic tax returns, telephone service, face-to-face
assistance, and Web site service. GAO also examined whether IRS has
long-term goals to help assess progress and guide in making decisions.
Finally, GAO summarized IRS's response to Hurricanes Katrina and Rita, and
their possible effects on IRS's performance.

[36]What GAO Recommends

GAO recommends that IRS develop better information about the costs of
mandatory electronic filing of tax returns for certain categories of tax
practitioners and establish a schedule for developing its long-term goals.

In comments, IRS agreed with the recommendations.

IRS improved some filing season services. According to officials, IRS made
a strategic decision to reduce others to accommodate budget cuts. IRS's
processing of returns and refunds went smoothly. Accuracy of responses to
telephone inquiries about tax law and about taxpayers' accounts
significantly improved. And, IRS's Web site performed well. On the other
hand, in response to budget cuts, IRS reduced access to telephone
assistors, resulting in longer wait-times and more callers hanging up. IRS
officials viewed telephone access as a more flexible area for absorbing
budget cuts than, for example, processing. The number of taxpayers
visiting IRS walk-in sites continued to decline, while the number of tax
returns prepared at volunteer sites increased. This is consistent with
IRS's strategy of reducing the number of its employees providing expensive
face-to-face assistance. IRS continues to lack reliable data on the
accuracy of walk-in and volunteer site assistance but has plans in place
to improve quality measurement.

For the first time, more than half of individual tax returns were filed
electronically, which is important because electronic filing has allowed
IRS to reduce resources devoted to processing paper returns. However,
despite IRS's actions to promote electronic filing, it is not on track to
achieve its long-term goal of having 80 percent of such returns filed
electronically by 2007. State mandated electronic filing has proven
effective at encouraging electronic filing at the federal level and one
IRS advisory group has recommended a federal mandate. However, little is
known about the costs and burdens of such mandates.

IRS has been developing long-term goals to help assess agency progress and
understand the impact of budget decisions. Because of the difficulty in
developing goals, IRS has experienced delays and lacks a schedule for
finalizing those goals.

IRS is taking numerous actions to assist taxpayers affected by Hurricanes
Katrina and Rita. Most of the impact on IRS, such as more questions from
taxpayers, will be felt during the 2006 filing season and beyond.

IRS's 2005 Filing Season Activities

References

Visible links
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-51
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