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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