Internal Revenue Service: Interim Results of the 2007 Tax Filing
Season and the Fiscal Year 2008 Budget Request (03-APR-07,
GAO-07-673).
The Internal Revenue Service's (IRS) tax filing season
performance is a key indicator of how well IRS serves taxpayers.
This year's filing season was expected to be risky because of tax
system changes, including the telephone excise tax refund (TETR).
IRS's fiscal year (FY) 2008 budget request shows its spending
proposal for taxpayer service, enforcement, and Business Systems
Modernization (BSM). The request includes initiatives to reduce
the tax gap, the difference between what taxpayers owe and what
they voluntarily pay on time. IRS recently estimated the net tax
gap to be $290 billion in 2001. GAO was asked to (1) describe
IRS's 2007 filing season performance, (2) determine how IRS's
proposed FY 2008 budget compares to prior years', provides
information on how proposals may impact the tax gap, justifies
new spending, and whether there are opportunities to reduce or
reallocate resources, and (3) evaluate the status of IRS's
efforts to develop and implement BSM.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-673
ACCNO: A67725
TITLE: Internal Revenue Service: Interim Results of the 2007 Tax
Filing Season and the Fiscal Year 2008 Budget Request
DATE: 04/03/2007
SUBJECT: Cost analysis
Customer service
Electronic forms
Excise taxes
Internal controls
Program evaluation
Tax administration systems
Tax expenditures budgets
Tax refunds
Tax returns
Taxes
Taxpayers
Voluntary compliance
Tax gap
GAO High Risk Series
IRS Business Systems Modernization
Program
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GAO-07-673
* [1]Scope and Methodology
* [2]Agency Comments
* [3]Appendix I: Updated Briefing Slides from the March 15, 2007,
* [4]Appendix II: GAO Contact and Staff Acknowledgments
* [5]GAO Contact
* [6]Staff Acknowledgment
* [7]Order by Mail or Phone
Report to the Ranking Minority Member, Subcommittee on Oversight,
Committee on Ways and Means, House of Representatives
United States Government Accountability Office
GAO
April 2007
INTERNAL REVENUE SERVICE
Interim Results of the 2007 Tax Filing Season and the Fiscal Year 2008
Budget Request
GAO-07-673
Contents
Letter 1
Scope and Methodology 4
Agency Comments 5
Appendix I Updated Briefing Slides from the March 15, 2007, briefing to
the Subcommittee on Oversight, House Committee on Ways and Means 7
Appendix II GAO Contact and Staff Acknowledgments 36
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separately.
United States Government Accountability Office
Washington, DC 20548
April 3, 2007
The Honorable Jim Ramstad
Ranking Minority Member
Subcommittee on Oversight
Committee on Ways and Means
House of Representatives
Dear Mr. Ramstad:
Effective tax administration requires a balance of taxpayer service and
tax law enforcement. To provide enforcement and taxpayer service in fiscal
year (FY) 2008, the Internal Revenue Service (IRS) has requested an $11.6
billion1 operating level budget with about 63 percent going for
enforcement activities and 31 percent for taxpayer service (including
operational support). The remaining request includes funding to develop
and implement modernized information systems.
IRS provides much of its services to taxpayers during the annual tax
return filing season, making filing season performance a key indicator of
how well IRS is serving taxpayers. 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 98).2
Improvements include increased electronic filing, better access to IRS's
telephone assistors, and more accurate answers to taxpayers' questions.
However, we have also described taxpayer service challenges such as the
quality of assistance at walk-in and volunteer sites where taxpayers get
face-to-face assistance. Moreover, the Commissioner of Internal Revenue
stated that this year's filing season is high risk for several reasons,
including challenges in implementing the new telephone excise tax refund
(TETR), split refund option (refunds can now be directly deposited to up
to three separate accounts), and several tax law extensions that passed
late in 2006.
1 The $11.6 billion includes $11.1 billion in new appropriated funds and
$0.5 billion in other funds.
2 See, for example, GAO, Tax Administration: IRS Improved Some Filing
Season Services, but Long-term Goals Would Help Manage Strategic
Trade-offs, [8]GAO-06-51 (Washington, D.C.: Nov. 14, 2005), Internal
Revenue Service: Assessment of the Interim Results of the 2006 Filing
Season and Fiscal Year 2007 Budget Request, [9]GAO-06-615T (Washington,
D.C.: Apr. 6, 2006), and Tax Administration: Most Filing Season Services
Continue to Improve, but Opportunities Exist for Additional Savings,
[10]GAO-07-27 (Washington, D.C.: Nov. 15, 2006).
Although IRS has increased revenue collected through its enforcement
programs in recent years, enforcement continues to be included on our list
of high-risk federal programs.3 This is due, in part, to the persistence
of a large tax gap.4 IRS estimated the gross tax gap to be $345 billion
for tax year 2001. After late payments by taxpayers and revenue brought in
by IRS's enforcement efforts, the resulting net tax gap is estimated to be
$290 billion.
Another high-risk challenge is IRS's ongoing Business Systems
Modernization (BSM) program, a multibillion-dollar, highly complex effort
that involves the development and delivery of a number of modernized
information systems that are intended to replace the agency's aging
business and tax processing systems. The program is critical to supporting
IRS's taxpayer service and enforcement goals and reducing the tax gap. We
recently reported that despite progress made in implementing BSM projects
and improving modernization management controls and capabilities,
significant challenges and serious risks remain, and further program
improvements are needed, which IRS is working to address.5
In light of the challenges IRS faces, you asked us to assess IRS's 2007
tax filing season performance, FY 2008 budget request, and the status of
the BSM program. Our objectives were to (1) describe IRS's 2007 tax filing
season performance for returns processing and taxpayer assistance
including the impact of tax system changes, such as the TETR, split refund
option, and several tax law extensions that passed late in 2006, (2)
assess IRS's proposed FY 2008 budget and compare it with prior years'
spending and staffing and determine what information it provides on the
impact of proposals on the tax gap, how new spending initiatives are
justified, and whether there are opportunities to reduce or reallocate
resources, and (3) evaluate the status of IRS's efforts to develop and
implement BSM.
3 GAO, High-Risk Series: An Update, [11]GAO-07-310 (Washington, D.C.:
January 2007).
4 The tax gap is an estimate of the difference between what taxpayers pay
in taxes voluntarily and on time and what they should pay under the law.
5GAO, Business Systems Modernization: Internal Revenue Service's Fiscal
Year 2007 Expenditure Plan, [12]GAO-07-247 (Washington, D.C.: Feb. 15,
2007).
On March 15, 2007, we briefed your staff and staff of the Subcommittee
Chair on the preliminary observations of our review. This report transmits
the updated materials we used at the briefing, which are reprinted as
appendix I.
In summary, we made the following major points:
o Despite initial concerns and IRS's characterization of this
year's filing season as high risk, early data show that tax
systems changes have not had a significant effect on filing season
operations or performance. In particular, TETR-related requests
and telephone calls have been far less than IRS planned. As of
March 16, 2007, IRS has processed 63.5 million individual income
tax returns, with 69 percent including TETR requests. The number
of returns filed electronically is 5 percent greater than this
time last year. Also, IRS is achieving its goals for telephone
service. However, there are areas of concern. In early March, the
latest release of the Customer Account Data Engine (CADE), one of
IRS's key tax return processing systems, became operational--2
months behind schedule. As a result of the delay, IRS has had
slower processing times and delayed refunds for up to several days
for millions of taxpayers. This delay may have a more serious
impact on IRS's ability to deliver future releases of CADE,
because it caused contention for key resources, but it is too
early to know. Taxpayers' use of the Free File program (an
alliance of companies that offer free return preparation and
electronic filing on their Web sites to eligible taxpayers) is 5.5
percent below last year at this time.
o IRS's 2008 budget request would increase spending, particularly
for enforcement. The $11.6 billion requested total operating
budget is an increase of $608.8 million (5.6 percent) over the FY
2007 continuing resolution level. IRS proposes spending $7.2
billion for enforcement (including operational support), an
increase of 6.5 percent, continuing a trend since 2004 of shifting
a greater proportion of overall spending toward enforcement as
compared to taxpayer service. IRS's budget request includes
initiatives and legislative proposals to address the tax gap.
There is limited data in IRS's request on the expected impact of
the proposals on the gap. The expected direct enforcement revenue
to be gained is small compared to the size of the tax gap. For
example, IRS expects to yield about $699 million in FY 2010, or
about 1/4 of 1 percent of the tax year 2001 net tax gap from
additional enforcement staffing. However, the indirect effect on
voluntary compliance is unknown. Several research studies by
economists, while subject to data limitations, suggest that
indirect revenue might exceed direct revenues gained. We asked for
supplementary documents on six initiatives to better understand
their expected benefits and costs. The documented justifications
for those initiatives varied in the depth of useful information
they provided. We continue to assess the justifications for the
initiatives and whether IRS could cost effectively provide
additional information that could be useful for the Congress and
others as they assess IRS's budget request. IRS identified savings
in the 2008 budget request, but other savings opportunities may
exist. For example, IRS may be able to change the mix of services
provided--such as giving taxpayers more options for help by e-mail
or its Web site in place of more costly telephone or walk-in
operations--but its study to identify cost-effective service
delivery methods is several months behind schedule.
o IRS continues to make progress in implementing BSM projects and
meeting cost and schedule commitments, but two key projects--CADE
(discussed above) and Modernized e-File (a new electronic filing
system)--experienced significant cost overruns during 2006. Future
BSM project releases face serious risks, which IRS is working to
mitigate. For example, delays in deploying the latest release of
CADE have resulted in contention for key resources and will likely
impact the design and development of the next two important
releases, which are scheduled to be deployed later this year. IRS
has made significant progress in implementing our prior
recommendations and improving its modernization management
controls and capabilities. However, critical controls and
capabilities related to requirements development and management
and post implementation reviews of deployed BSM projects have not
yet been fully implemented. In addition, more work remains to be
done by the agency to fully develop a long-term vision and
strategy for completing the BSM program, including establishing
time frames for consolidating and retiring legacy systems.
Scope and Methodology
To assess IRS's filing season performance for processing,
telephones, face-to-face assistance and its Internet Web site, we
obtained and analyzed IRS's performance and production data and
compared it to annual goals and prior years' performance. Our work
also included direct observations of key filing season operations,
and interviews with IRS officials and other external stakeholders.
To assess IRS's 2008 budget request, we reviewed IRS's
congressional budget justifications and supplementary documents to
(1) identify trends in spending and staffing from FYs 2004 through
2008, (2) assess information on the tax gap and selected spending
initiatives to assess the information provided to justify the
request, and (3) identify areas of potential opportunities for
savings and efficiencies. Our assessment is based on a comparative
analysis funding, expenditures, and other documentation and
interviews with IRS officials.
Our filing season and budget audit work was done primarily at
IRS's National Office and its operating divisions including the
Large and Mid-Size Business operating division in Washington, D.C;
Small Business/Self-Employed operating division in New Carrollton,
Md; and Wage and Investment Division operating division
headquarters and Joint Operations Center and call site in Atlanta,
Ga. We also interviewed officials at the IRS Oversight Board in
Washington, D.C. Additionally, we reviewed relevant external
documentation and our reports and reports of the Treasury
Inspector General for Tax Administration.
Our analysis of the BSM program was based primarily upon the
results of our detailed review of the FY 2007 BSM expenditure plan
that we issued in a recent report.6
6 [22]GAO-07-247 .
In past work, we assessed IRS's budget and filing season
performance data. We considered filing season performance measures
and data that cover the quality, accessibility, and timeliness of
IRS's services to be objective and reliable based on our prior
work. Since the data sources and procedures for producing this
year's budget and filing season data have not significantly
changed from prior years, we determined that the data were
sufficiently reliable for the purposes of this report. To the
extent possible, we corroborated information from interviews with
documentation and data and where not possible, we report the
information as attributed to IRS officials. We have determined
that the estimates for cost savings and Web site performance come
from competent sources and are reasonable. Data limitations are
discussed where appropriate. We performed our work from December
2006 through March 2007 in accordance with generally accepted
government auditing standards.
Agency Comments
In commenting on a draft of this report, IRS officials emphasized
that the budget's initiatives and legislative proposals will
result in additional direct and indirect revenue and, ultimately,
increase compliance. It also reported that it will soon release
its strategic plan for taxpayer service delivery, which will serve
as the foundation for future decisions for service improvements
and efficiencies.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of other Senate and House committees and
subcommittees that have appropriation, authorization, and
oversight responsibilities for the IRS. We are also sending copies
to the Commissioner of Internal Revenue, the Secretary of the
Treasury, the Chairman of the IRS Oversight Board, and the
Director of the Office of Management and Budget. Copies are also
available at no charge on the GAO Web site at
http://www.gao.gov .
If you or you staff have any questions or wish to discuss the
material in this briefing further, please call me at (202)
512-9110 or at [email protected] . Contact points for our offices
of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions
to this report are listed in Appendix II.
Sincerely yours,
James R. White
Director, Tax Issues Strategic Issues Team
Appendix I: Updated Briefing Slides from the March 15, 2007,
briefing to the Subcommittee on Oversight, House Committee on Ways
and Means
Appendix II: GAO Contact and Staff Acknowledgments
GAO Contact
James R. White, (202) 512-9110 or [email protected]
Staff Acknowledgment
In addition to the contact person named above, Amy Dingler,
Charles R. Fox, Carol Henn, Timothy D. Hopkins, Ronald W. Jones,
Matthew Kalmuk, Varflay Kesselly, Jennifer McDonald, Paul B.
Middleton, Sabine R. Paul, David A. Powner, Cheryl Peterson, Neil
Pinney, and Joanna Stamatiades made key contributions to this
report.
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Visible links
8. http://www.gao.gov/cgi-bin/getrpt?GAO-06-51
9. http://www.gao.gov/cgi-bin/getrpt?GAO-06-615T
10. http://www.gao.gov/cgi-bin/getrpt?GAO-07-27
11. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
12. http://www.gao.gov/cgi-bin/getrpt?GAO-07-247
22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-247
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