Internal Revenue Service: Assessment of the 2008 Budget Request  
and an Update of 2007 Performance (09-MAY-07, GAO-07-719T).	 
                                                                 
The Internal Revenue Service's (IRS) budget request shows how IRS
intends to balance spending for enforcement and taxpayer service,
including spending for new initiatives and the Business Systems  
Modernization (BSM) program. A combination of enforcement and	 
taxpayer service promotes compliance with the tax laws. GAO was  
asked to (1) compare IRS's proposed FY 2008 budget to prior	 
years' and assess how the new spending initiatives are justified,
and (2) describe IRS's enforcement, filing season, and BSM	 
performance. GAO analyses are based on IRS's 2008 budget	 
submission, supplementary IRS data, interviews with IRS 	 
officials, and prior GAO reports. Some of GAO's analyses have	 
been reported earlier this year and updated here.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-719T					        
    ACCNO:   A69365						        
  TITLE:     Internal Revenue Service: Assessment of the 2008 Budget  
Request and an Update of 2007 Performance			 
     DATE:   05/09/2007 
  SUBJECT:   Budget outlays					 
	     Future budget projections				 
	     Income taxes					 
	     Internal controls					 
	     Performance appraisal				 
	     Strategic planning 				 
	     Tax administration 				 
	     Tax law						 
	     Taxes						 
	     Taxpayers						 
	     Voluntary compliance				 
	     Tax gap						 
	     Budget requests					 
	     GAO High Risk Series				 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 

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GAO-07-719T

   

     * [1]IRS's Request Increases Enforcement Spending and Identifies

          * [2]Estimated Impact of Budget Proposals on Direct Revenue Is Mo
          * [3]Justifications for Some New Initiatives Lacked Basic Descrip

               * [4]Description of Problem or Performance Shortfall to Be
                 Addres
               * [5]Description of Work to be Done and Explanation of
                 Estimated
               * [6]Performance Measures and Goals

          * [7]Other Opportunities Exist for Generating Savings

     * [8]IRS Has Made Progress on Enforcement, but Enforcement Remain

          * [9]IRS Has Taken Some Steps to Improve Enforcement
          * [10]Enforcement of the Tax Laws Remains High Risk

     * [11]IRS's Filing Season Performance Is Improved in Some Areas wi

          * [12]Returns Processing Is Comparable to Last Year, Despite Delay

               * [13]CADE Will Expedite Refunds for Millions of Taxpayers,
                 but De
               * [14]Electronic Filing Is Higher Than Last Year Despite a
                 Decline
               * [15]Tax System Changes Have Had Less Impact on Returns
                 Processin

          * [16]Call Volume Continues to Decline, IRS is Meeting Goals and P
          * [17]Use of Web Site Applications Continues to Increase, and Perf
          * [18]Limited Data on the Quality of Face-to-Face Assistance Show
          * [19]TAB is Intended to Improve Taxpayer Services in a Cost-effec

     * [20]Progress Made in BSM Implementation, but Challenges and Risk
     * [21]Conclusions
     * [22]Recommendation for Executive Action
     * [23]Contacts and Acknowledgments

          * [24]IRS's Budget and Filing Season
          * [25]Business Systems Modernization
          * [26]Tax Compliance
          * [27]Miscellaneous

     * [28]GAO's Mission
     * [29]Obtaining Copies of GAO Reports and Testimony

          * [30]Order by Mail or Phone

     * [31]To Report Fraud, Waste, and Abuse in Federal Programs
     * [32]Congressional Relations
     * [33]Public Affairs

Testimony

Before the Subcommittee on Financial Services and General Government,
Committee on Appropriations, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 3:00 p.m. EST
Wednesday, May 9, 2007

INTERNAL REVENUE SERVICE

Assessment of the 2008 Budget Request and an Update of 2007 Performance

Statement of James R. White
Director
Strategic Issues

David A. Powner
Director
Information Technology Management Issues

GAO-07-719T

Mr. Chairman and Members of the Committee:

We appreciate this opportunity to comment on the Internal Revenue
Service's (IRS) budget request as well as its performance in enforcing tax
laws, providing services this tax filing season, and modernizing its
information systems.

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
billion operating-level budget with about 63 percent going for enforcement
activities and 31 percent for taxpayer service (including operational
support).^1 The remainder includes funding to develop and implement IRS's
Business Systems Modernization (BSM) program, a multibillion-dollar,
high-risk, complex effort intended to help improve both enforcement and
taxpayer service.

Although IRS has increased direct revenue collected through its
enforcement programs in recent years, enforcement continues to be included
on our list of high-risk federal programs.^2 This is due, in part, to the
persistence of a large tax gap.^3 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, IRS estimates the
resulting net tax gap to be $290 billion.

The annual tax return filing season is when IRS provides much of its
service to taxpayers. From January through April, IRS processed over 100
million individual tax returns and issued refunds, handled tens of
millions of phone queries from taxpayers, and provided forms and answers
to questions for tens of millions of taxpayers on its Web site. Smaller
numbers of taxpayers were assisted at IRS's walk-in sites or at sites
operated by other organizations and staffed by volunteers. While it is
always a massive undertaking, the IRS Commissioner stated that this year's
filing season was 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 were enacted in December of
2006.^4

1 Internal Revenue Service (IRS) Fiscal Year (FY) 2008 Congressional
Budget Submission, February 5, 2007. The $11.6 billion includes $11.1
billion in new appropriated funds and $0.5 billion in other funds.

^2 GAO, High-Risk Series: An Update, [34]GAO-07-310 (Washington, D.C.:
January 2007).

^3 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.

As requested, our objectives in this statement are to compare IRS's
proposed FY 2008 budget submission with prior years' spending and staffing
and assess how new spending initiatives are justified, and whether there
are opportunities to reduce or reallocate resources. In addition, our
statement will describe IRS's performance in three areas: enforcement,
service to taxpayers so far this filing season (including the impact of
this year's tax system changes), and systems modernization.

Our analyses are primarily based on the information in IRS's FY 2008
budget request, supplementary data from IRS, interviews with IRS officials
and other tax experts, IRS's filing season performance measures and our
past reports on IRS's enforcement, filing season, and systems
modernization programs. Some of our analyses have been reported earlier
this year, but are updated here.^5 Since sources and procedures for
producing this year's data have not changed significantly changed from
prior years, we determined that the data we used were sufficiently
reliable for the purposes of this statement. Data limitations are
discussed where appropriate. Our review of justifications for selected new
spending initiatives used criteria based on our previous work on
results-oriented government and performance budgeting. We selected 6 of
the total 14 non-legislative new spending initiatives for review based on
certain characteristics that we believed might affect how they were
justified.^6 We reviewed the justifications to determine whether they
included basic information such as the problem or performance shortfall to
be addressed, work to be done, explanations of estimated costs, and
measures and goals.^7 We reviewed IRS's efforts to address our prior year
recommendations related to our annual filing season and BSM work. We
performed our work from December 2006 through April 2007 in accordance
with generally accepted government auditing standards.

^4 The Tax Relief and Health Care Act of 2006 signed into law in December
2006 extended some provisions that expired at the end of calendar year
2005. These changes include extensions of three tax deductions: (1) state
and local sales tax, (2) higher education tuition and fees, and (3)
educator expenses. Pub. L. No. 109-432, Dec. 20, 2006.

^5 GAO, 2007 Tax Filing Season: Interim Results and Updates of Previous
Assessments of Paid Preparers and IRS's Modernization and Compliance
Research Efforts, [35]GAO-07-720T (Washington, D.C.: Apr. 12, 2007); Tax
Administration: Telephone Excise Tax Refund Requests Are Fewer Than
Projected and Have Had Minimal Impact on IRS Services, [36]GAO-07-695
(Washington, D.C.: Apr. 11, 2007); Internal Revenue Service: Interim
Results of the 2007 Tax Filing Season and the Fiscal Year 2008 Budget
Request, [37]GAO-07-673 (Washington, D.C.: Apr. 3, 2007); Tax Compliance:
Multiple Approaches Are Needed to Reduce the Tax Gap, [38]GAO-07-488T
(Washington, D.C.: Feb. 16, 2007); and Business Systems Modernization:
Internal Revenue Service's Fiscal Year 2007 Expenditure Plan,
[39]GAO-07-247 (Washington, D.C.: Feb. 15, 2007).

In summary, we make the following major points:

           o IRS's 2008 budget request proposes to increase spending,
           particularly for enforcement. The $11.6 billion requested total
           operating budget is an increase of $608.8 million (4.9 percent)
           over the FY 2007 level. IRS proposes spending a total of $7.2
           billion for enforcement, including operational support. This
           continues a trend since 2004 of shifting a greater proportion of
           spending to enforcement and away from taxpayer service. The budget
           submission includes IRS initiatives and legislative proposals to
           address the tax gap. However, the expected direct enforcement
           revenue (i.e., the amount collected from taxpayers targeted by
           IRS's enforcement efforts) to be gained is small compared to the
           size of the tax gap. For example, in FY 2010, after the
           initiatives are phased-in, IRS expects to collect an additional
           $699 million in direct enforcement revenue--or about one-fourth of
           1 percent of the tax year 2001 net tax gap--from added enforcement
           staff. Furthermore, the justifications for initiatives varied in
           the information they provided, with some lacking basic
           descriptive, cost, and expected performance information suitable
           for assessing them. For example, an initiative to determine the
           impact of taxpayer service on compliance lacked information such
           as a problem statement and an explanation of estimated costs. IRS
           identified savings in the 2008 budget request, and we identified
           additional savings opportunities in our past work including
           mandating electronic filing for certain tax preparers and
           consolidating and retiring legacy information systems.

           o Despite progress, enforcement of the tax laws remains on our
           high risk list because of the tax gap. The tax gap has been a
           persistent problem in spite of a myriad of efforts to reduce it.
           The rate at which taxpayers pay their taxes voluntarily and on
           time has tended to range from around 81 percent to around 84
           percent over the past three decades. To be in a position to more
           effectively address the tax gap, IRS needs more compliance
           research, which we have long supported. IRS has requested funding
           to do a rolling sample of audits of individual taxpayer accounts
           (small annual samples that would replace larger but intermittent
           efforts). While we have concerns about the amount of information
           provided to justify the specific request, we have been generally
           supportive of such an approach. Finally, we have reported on the
           need for a data-based plan to improve compliance. In a recent
           hearing, the Chairman of the Senate Finance Committee asked the
           Secretary of the Treasury for a more detailed plan by July 2007.

           o IRS's filing season performance improved in some areas, although
           there have been challenges. As of April 20, IRS processed
           approximately

           104.6 million individual income tax returns, and issued 88.2
           million refunds. Electronic filing continued to grow, almost 8.5
           percent greater than last year. Challenges include the taxpayers'
           use of the Free File program which was slightly less than last
           year and a 2 month delay in IRS's latest release of the Customer
           Account Data Engine (CADE), a modern tax return processing system
           that issues faster refunds. As of April 20, IRS had posted 9.1
           million returns by CADE, far fewer than the 33 million IRS
           originally planned. As a result, millions of taxpayers did not
           receive the benefits of CADE's faster posting and subsequent
           refund issuance. Regarding taxpayer service, telephone access is
           somewhat better and the accuracy of IRS's answers to taxpayer
           questions is comparable to last year. Use of IRS's Web site
           continues to increase, which is important because it is available
           around the clock and is lower cost than most other types of
           assistance. Despite the filing season being characterized as
           high-risk, in large part because of TETR, the impact of TETR on
           taxpayer services has been much less than IRS anticipated. Longer
           term, through its Taxpayer Assistance Blueprint (TAB), IRS plans
           to improve taxpayer services by assessing taxpayers' needs and
           preferences. TAB provides information on the cost per service
           contact. Having such information could assist IRS in determining
           whether it can provide taxpayers services through lower cost
           options.

           o IRS continues to make progress in implementing BSM projects and
           meeting cost and schedule commitments, but two key projects--CADE
           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.

           As we will discuss in more detail later in this statement, we
           recommend that the Commissioner of Internal Revenue

           o have available basic descriptive, cost, and expected performance
           information on the spending initiatives proposed in the 2008
           budget submission to the extent that such information has not been
           provided, and

           o include in future budget submissions, basic descriptive, cost,
           and expected performance information on new spending initiatives,
           with supplementary documentation available if needed.

           In email comments on a draft of this statement, IRS's Chief
           Financial Officer agreed with the second recommendation, but not
           the first. She stated that the FY 2008 budget and justification
           did provide basic descriptive, cost, and expected performance
           information for each initiative. While we agree that for every
           initiative IRS provided the total proposed spending, some
           initiatives lacked basic information such as on how the amount to
           be spent was determined and work to be done. For example, the
           initiative for improving compliance estimates provided no
           explanation of how the 258 FTEs were determined or basic
           information on the work such as the number of examinations to be
           conducted. Without such information, at the end of the fiscal
           year, Congress would be unable to tell whether IRS spent the money
           as intended.

6 The characteristics we considered to select a subset of initiatives that
would be similar to universe of initiatives were the (1) type of
initiative, (such as enforcement, taxpayer service, research, or
information system), (2) responsible IRS operating division, and (3)
dollar amount requested.

^7 [40]GAO-07-310 .

IRS's Request Increases Enforcement Spending and Identifies Savings, but
Provides Limited Justification for Some New Spending, and Other Savings
Opportunities Exist

           IRS's 2008 budget request proposes to increase spending. The $11.6
           billion requested total operating budget is an increase of $608.8
           million (almost 5 percent) over the FY 2007 level as shown in
           table 1.^8 IRS proposes to fund 92,814 full-time equivalents
           (FTE), a slight decrease compared to the FY 2007 level.^9

Table 1: IRS's Changes in Funding and Full-time Equivalents for Fiscal
years 2006 through 2008

Dollars in thousands                                                                            
                                                                                Net           Net
                                                                             percentage   percentage
                                                                               change    change Fiscal
                                                          Fiscal year 2008  Fiscal years     years
                   Fiscal year 2006^a  Fiscal year 2007      requested       2007-2008     2006-2008
Appropriation                                                                                          
Accounts                Dollar    FTE      Dollar    FTE      Dollar    FTE Dollar   FTE Dollar    FTE 
Enforcement         $4,708,441 49,534  $4,741,680 48,307  $4,925,498 48,667   3.88  0.75   4.61  -1.75 
Taxpayer Service     2,142,042 32,050   2,156,988 31,557   2,103,089 30,160  -2.50 -4.43  -1.82  -5.90 
Operations Support   3,461,205 13,468   3,470,882 12,890   3,769,587 12,957   8.61  0.52   8.91  -3.79 
Business Systems                                                                                       
Modernization          242,010    317     212,659    317     282,090    317  32.65     0  16.56   0.00 
Health Insurance                                                                                       
Tax Credit              20,008     17      14,856     17      15,235     17   2.55     0 -23.86   0.00 
Subtotal                                                                                               
Appropriated                                                                                           
Resources          $10,573,706 95,386 $10,597,065 93,088 $11,095,499 92,118   4.70 -1.04   4.93  -3.43 
Reimburseables        $158,820  1,350     125,723    N/A     133,498    696   6.18   N/A -15.94 -48.44 
User Fees               19,000    N/A     150,000    N/A     180,000    N/A  20.00   N/A 847.37    N/A 
Available                                                                                              
multi-year/no-year                                                                                     
funds                  169,006    N/A   143,282^b    N/A     149,135    N/A   4.08   N/A -11.76    N/A 
Total program                                                                                          
operating level    $10,920,532 96,736 $11,016,070 93,088 $11,558,132 92,814   4.92 -0.29   5.84  -4.05 

^8 When adjusted for inflation, the funding requested in FY 2008 would be
about a 0.5 percent increase since 2004.

^9IRS provided updated full-time equivalent (FTE) data from what is shown
in its budget request, based on its enacted FY 2007 budget. An FTE is
equivalent of one person working full-time for 1 year with no overtime.

Source: GAO analysis of IRS data.

Note: N/A means not applicable.

aThe amounts are IRS's estimated allocations of funding of its previous
appropriations accounts based on the new budget appropriation structure
established in 2008. According to IRS officials, data is not available
prior to FY 2006 because of the appropriations account restructuring.

bAt the time IRS reported the estimated amount of available
multi-year/no-year funds in its 2008 budget request, the regular 2007
appropriation had not been enacted. Therefore, this amount represents the
amount available under the continuing resolution in effect at that time.

Table 1 summarizes IRS's appropriation accounts and shows that its 2008
budget submission continues a trend of shifting spending toward
enforcement.

The request for $4.9 billion for direct enforcement appropriations is an
increase of 3.9 percent over the FY 2007 level and almost 4.6 percent over
the FY 2006 level.^10

Table 1 also shows that IRS is requesting more funding for operational
support in 2008 over the 2007 level. Among the reasons for the increased
spending is that IRS is proposing to reduce the backlog of outdated
information systems and telecommunications equipment. Finally, IRS is
requesting $282 million for its BSM program--a significant increase in
funding over both FYs 2006 and 2007. This includes over $55 million for
developing and deploying the capability to accept individual income tax
returns on Modernized e-File and $16 million for new Web portals to
support key business processes and compliance initiatives.

^10 Pub. L. No. 110-5, Feb. 15, 2007.

When operational support funding shown in table 1 is allocated to
enforcement and taxpayer service, a more complete picture of what IRS
actually spends on these activities emerges. Based on the allocation
reported in the budget request, IRS plans to spend a total of $7.2 billion
for enforcement and $3.6 billion for taxpayer service. Including
operational support, IRS is requesting almost 56,600 FTEs for enforcement
and about 35,200 FTEs for taxpayer service (an increase of 0.7 percent and
a decrease of 3.7 percent, respectively, compared to FY 2007 levels).

Figure 1 shows that this continues a trend since 2004 of shifting a
greater portion of spending toward enforcement as compared to service. In
years following passage of the IRS Restructuring and Reform Act of 1998,
IRS made significant progress in taxpayer service, although there were
declines in many aspects of enforcement activities, such as for
enforcement staff and revenue collected as shown in figures 2 and 3,
respectively, later in this statement.^11 However, at FY 2008 requested
levels, total spending for enforcement will increase by over 19 percent
while spending for taxpayer service will decrease by almost 4 percent
since 2004.^12

11 Pub. L. No. 105-206, July 22, 1998.

^12 In contrast, consumer prices are projected to increase by about 11.6
percent from FY 2004 to FY 2008.

Figure 1: Funding for IRS Enforcement and Taxpayer Service Programs,
Including Operational Support, Fiscal Years 2004 through 2008

Note: Funding levels for all FYs are IRS estimates, with the exception of
FY 2008, which is requested.

  Estimated Impact of Budget Proposals on Direct Revenue Is Modest Compared to
  the Tax Gap but the Effect on Indirect Revenue Is Not Known

In the 2008 budget submission, IRS proposes a number of new initiatives,
all of which are intended to improve taxpayer compliance--some by
increasing staffing for enforcement or making legislative changes, and
some by improving taxpayer service or infrastructure. The request includes
estimates of the annual costs of the initiatives plus, for some
initiatives, dollar estimates of the increased revenue expected to be
realized, as summarized in table 2.

IRS recognizes that there are likely revenue effects beyond those shown in
table 2. Table 2 shows, for example, the direct revenue from new
enforcement initiatives. Direct revenue is the amount collected from
taxpayers targeted by IRS enforcement actions, such as audits. However,
the budget submission states that enforcement actions have indirect
revenue effects as well by increasing voluntary compliance by all
taxpayers.^13

The magnitude of the indirect effects of enforcement is not known with a
high level of confidence because of challenges in measuring compliance;
developing reasonable assumptions about taxpayer behavior; and accounting
for factors outside of IRS's actions that can affect taxpayer compliance,
such as changes in tax law. However, several research studies have offered
insights to help better understand the indirect effects of IRS enforcement
on voluntary tax compliance and show that they could exceed the direct
effect of revenue obtained.^14 Given the uncertainty of estimates of
indirect revenue, in its budget request, IRS says that it cannot measure
the impact of deterrence of enforcement or service on compliance, but only
that their effects are positive. Finally, the budget request also
recognizes that the initiatives intended to improve taxpayer service or
modernize information systems are also expected to ultimately improve
taxpayer compliance. Again, however, reliable information about the
magnitude of the improvement is not available.

^13 Two types of indirect revenue are the increase in voluntary compliance
(1) in the larger population resulting from examinations or other
enforcement and nonenforcement actions on targeted taxpayers, and (2) of
the targeted taxpayer in subsequent years.

^14Economists have estimated the indirect effect of an examination on
voluntary compliance to range from 6 to 12 times the amount of proposed
tax adjustments. See Alan H. Plumley, The Determinants of Individual
Income Tax Compliance: Estimating The Impacts of Tax Policy, Enforcement,
and IRS Responsiveness, Publication 1916 (Rev. 11-96) (Washington, D.C.:
November 1996), 2, 35-36; Jeffrey A. Dubin, Michael J. Graetz, and Louis
L. Wilde, "The Effect of Audit Rates on the Federal Individual Income Tax,
1977-1986," National Tax Journal, vol. 43 (1990), 395, 396, 405; and
Jeffrey A. Dubin, "Criminal Investigation Enforcement Activities and
Taxpayer Noncompliance" (paper written for the IRS Research Conference,
June 2004), http://www.irs.gov/pub/irs-soi/04dubin.pdf (downloaded July 1,
2005).

Table 2: Estimated Cost and Direct Revenue of IRS Initiatives for Fiscal
Years 2008 through 2010

Dollars in millions                                          
                                                           Estimated direct
                                    Estimated cost of        revenue from
                                       initiatives           initiatives
                                   Fiscal Fiscal Fiscal  Fiscal Fiscal Fiscal 
                                     year   year   year    year   year   year 
Type of initiative                2008   2009   2010    2008   2009   2010 
Revenue-producing enforcement                                              
initiatives                       $198   $163   $163    $317   $526   $699 
Legislative initiatives             23     23     23     378  1,171  1,898 
Non-revenue-producing                                                      
initiatives                        188    168    168       0      0      0 
Total                             $410   $355   $355    $695 $1,697 $2,597 

Source: GAO analysis of IRS and Department of the Treasury data.

Notes: Figures may not sum to totals because of rounding. Data are from
IRS and from Treasury's February 2007 General Explanations of the
Administration's Fiscal Year 2008 Revenue Proposals.

Over the 3 years shown in table 2, IRS expects the estimated cost for the
initiatives will decrease while the resulting direct revenue increases.
IRS is requesting about $410 million for FY 2008 to fund all the
initiatives, with the estimated costs declining in FYs 2009 and 2010
because of start-up costs in FY 2008.

IRS is projecting that direct revenues will increase by about $2.6 billion
in FY 2010, as more staff are hired, trained, and become more productive,
and all aspects of the legislative initiatives are phased-in, particularly
for the information reporting requirements. However, the direct revenues
expected are small compared to the estimated $290 billion net tax gap for
tax year 2001.^15 For instance, the revenue-producing initiatives are
expected to yield about $699 million in FY 2010, or about one-fourth of 1
percent of the tax year 2001 net tax gap. In 2010, the total estimated
increased revenue from both the revenue-producing and legislative
initiatives, about $2.6 billion, is about 0.9 percent of the 2001 net tax
gap.

^15 IRS has concerns with the certainty of the overall tax gap estimate in
part because some areas of the estimate rely on old data and IRS has no
estimates for some areas of the tax gap. For example, IRS used data from
the 1970s and 1980s to estimate underreporting of corporate income taxes
and employer-withheld employment taxes.

No single approach, such as IRS enforcement, is likely to fully and
effectively address noncompliance. Multiple approaches are needed because
noncompliance has multiple causes and spans different types of taxes and
taxpayers. Approaches include devoting additional resources to
enforcement, providing more enforcement tools like information reporting,
improving taxpayer service, periodically measuring compliance, setting tax
gap reduction goals, leveraging technology to enhance IRS's efficiency,
and simplifying or reforming the tax code. For example, regarding
information reporting, we recently recommended to IRS, that to assist
taxpayers in accurately reporting their capital gains and losses from
securities, in the instructions to Schedule D clarify the appropriate use
of capital losses to offset capital gains or other income and provide
guidance on resources available to taxpayers to determine their basis.^16

Justifications for Some New Initiatives Lacked Basic Descriptive, Cost, and
Expected Performance Information

Justifications for the new spending initiatives varied in the basic
information they provided. In some cases, the budget submission lacked
information that would have allowed us or others to assess the proposed
spending and comment on, for example, whether the initiative would be a
worthwhile expenditure in light of expected benefits and costs. To better
understand IRS's initiatives and their expected benefits and costs, we
asked for supplementary documentation on selected new spending
initiatives:

           o Improve compliance among small businesses and self-employed
           (SB/SE) taxpayers: $73.2 million; 485 FTEs
           o Critical upgrades to IT infrastructure: $60 million; 0 FTEs
           o Improve tax gap estimates, measures, and noncompliance
           detection:

           $41.0 million; 258 FTEs

           o Improve compliance for large multinational businesses: $26.2
           million; 158 FTEs
           o Research effects of taxpayer service on compliance: $5.0
           million; 8 FTEs
           o Expand volunteer income tax assistance (VITA): $5.0 million; 46
           FTEs

           Our review of the justifications showed that some had descriptive,
           cost, and expected performance information while others lacked
           such information. Our previous work on results-oriented government
           and performance budgeting, states that budget requests and
           supporting documentation should provide information on the results
           to be achieved with the funding requested. More specifically, our
           work has shown that congressional decision makers benefit from
           information on the problem or performance shortfall to be
           addressed, cost estimates, and performance measures and goals.
		   
^16GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost
Basis Would Improve Compliance if Related Challenges Are Addressed,
[41]GAO-06-603 (Washington, D.C.: June 13, 2006).

             Description of Problem or Performance Shortfall to Be Addressed

           The justification for the initiative to upgrade IT infrastructure
           included information on the extent of the problem, including the
           impact of computer downtime on employee performance and how much
           IRS's aged computer inventory would grow without additional
           funding. Similarly, the initiatives to increase compliance among
           SB/SE taxpayers and large multinational businesses had such
           information as the portion of the tax gap that is attributable to
           certain types of taxpayers, data on growth in certain tax return
           filings for businesses that are high-risk for underreporting, and
           the need for increasing enforcement activity in these areas.
           However, the justification for expanding VITA did not provide
           problem or performance shortfall information, such as evidence of
           how some taxpayers do not receive needed services due to the
           current level of spending or problems with those taxpayers'
           compliance levels due to the lack of services. Similarly, the
           initiative to research the effects of taxpayer service on
           compliance did not explain the problem such research would
           correct.
		   
		     Description of Work to be Done and Explanation of Estimated Costs

           The IT initiative had information on the planned expenditures to
           upgrade specific computer equipment, including descriptions of the
           equipment and how it is to be used. Also, the initiatives to
           increase compliance among SB/SE taxpayers and large multinational
           businesses had descriptions of the types of staff to be hired and
           work to be done--such as examinations, collections, and legal
           support. However, the justifications for the initiatives to
           improve tax gap estimates and expand VITA lacked information on
           how IRS determined the amount requested or FTEs needed. We could
           not determine the budget or FTEs or specifics about the work to be
           done such as the number of examinations to be conducted. Further,
           the initiative to research the impact of service on compliance
           lacked descriptive details on the work to be done--such as
           potential research questions, methodologies, deliverables, and
           estimated costs of delivering them--that would provide examples of
           what IRS would accomplish with proposed spending and allow
           Congress or others to assess the initiative.
		   
		     Performance Measures and Goals

           The compliance initiatives had performance measures and goals,
           such as direct revenue to be generated or additional examinations
           to be conducted; the IT initiative had quantitative targets for
           reducing the aged computer inventory; the VITA initiative had a
           target for improving the quality of returns prepared by
           volunteers; and the tax gap estimate improvement initiative had
           quantitative targets related to examinations. However, the
           initiatives for researching the impact of service on compliance
           lacked a performance measure and target, such as, for improving
           the use of IRS resources based on the research.

           We do not contend that because some of the justifications were
           lacking in certain information that the initiatives are not
           worthwhile, or that all justifications should have the same extent
           and types of information. For example, although the justifications
           for conducting research to improve tax gap estimates and determine
           the effects of taxpayer service on compliance lacked certain
           information, in previous reports and testimony we have been
           supportive, in general, of such research.^17 However, without some
           explanation of how cost and resource needs were determined for
           these initiatives, assessments of whether the initiatives are
           worth their costs are not possible.

           Since gathering basic information to justify an initiative has
           costs, it is reasonable for justifications of more costly
           initiatives to have more detail. When all the basic information
           becomes too cumbersome to include in the budget submission itself,
           an agency can supplement its request with readily available
           supporting documentation.		   
		   
           Other Opportunities Exist for Generating Savings

           In its 2008 budget request, IRS identified $120 million in savings
           as it has done in prior years--$82.3 million through enhancing
           technology and streamlining work processes in its enforcement
           programs and $37.7 million through increases in electronic filing
           from its taxpayer service programs. IRS is proposing to use all
           internally generated savings to maintain its current operating
           levels.^18
		   
^17 GAO, Internal Revenue Service: Assessment of the Interim Results of
the 2006 Filing Season and Fiscal Year 2007 Budget Request,
[42]GAO-06-499T (Washington, D.C.: Apr. 27, 2006); Tax Compliance: Better
Compliance Data and Long-term Goals Would Support a More Strategic IRS
Approach to Reducing the Tax Gap, [43]GAO-05-753 (Washington, D.C.: July
18, 2005); and Tax Compliance: Reducing the Tax Gap Can Contribute to
Fiscal Sustainability but Will Require a Variety of Strategies,
[44]GAO-05-527T (Washington, D.C.: Apr. 14, 2005).	

^18 We have previously noted that IRS reported it realized most or all of
the savings it identified in prior budget proposals and, based on this
history, there is no reason to expect that IRS will not be able to realize
the same with this year's proposed savings.

           In addition to the areas identified by IRS in its budget request,
           there are additional opportunities for savings and efficiency
           gains.

           o Increasing electronic filing through mandates: Last year we
           reported that state mandates that required paid preparers who file
           a certain number of tax returns to electronically file state tax
           returns increased federal electronic filing.^19 Without a federal
           mandate, IRS is missing an opportunity for savings--using IRS's
           estimate that it saves $2.38 on every return that is processed
           electronically we estimated that IRS would save $68 million per
           year if 90 percent of returns submitted by preparers that are
           currently filed on paper were filed electronically.^20 However,
           IRS lacks the authority to mandate electronic filing for paid
           preparers and we suggested to Congress that it mandate filing by
           paid preparers meeting criteria, such as filing a certain number
           of tax returns.

           o Consolidating telephone call sites: We previously reported that
           IRS has excess space at its call site operations and the agency
           had a study underway to determine the feasibility of consolidating
           those operations.^21 IRS has nearly completed the first phase of
           the study and plans to complete the second phase in 2008.
           According to IRS officials, this study is on schedule and is
           important because it will allow IRS to identify the costs and
           benefits of consolidating phone operations.

           o Consolidating or retiring legacy systems: We have previously
           recommended that IRS prepare a long-term vision and strategy for
           completing the BSM program, including establishing time frames for
           consolidating and retiring legacy systems.^22 While IRS developed
           an initial modernization vision and strategy and associated 5-year
           plan, more remains to be done for IRS to fully address our
           recommendation. Consolidating and retiring legacy systems should
           lead to a reduction in costs associated with maintaining these
           systems.
		   
^19 GAO, Tax Administration: Most Filing Season Services Continue to
Improve, but Opportunities Exist for Additional Savings, [45]GAO-07-27
(Washington, D.C.: Nov. 15, 2006).

^20 [46]GAO-07-27 .

^21 [47]GAO-07-27 .

^22 GAO, Business Systems Modernization: Internal Revenue Service's Fiscal
Year 2005 Expenditure Plan, [48]GAO-05-774 (Washington, D.C.: July 22,
2005).

           o Changing the menu of taxpayer services: IRS recently issued its
           comprehensive strategy for improving taxpayer service, including
           for telephone, walk-in, volunteer and Web site assistance. That
           strategy, known as TAB, was developed in response to a
           congressional directive. In addition to providing information on
           taxpayer needs of service, TAB provides information on the cost of
           taxpayer serviced for the various types of service. Information on
           needs and costs, along with a better understanding of taxpayer's
           preferences, needs and expectations, could provide taxpayers with
           the same taxpayer service benefits at a lower cost through
           alternative methods.
		   
		   IRS Has Made Progress on Enforcement, but Enforcement Remains High
		   Risk Because of the Tax Gap

           IRS has made noticeable progress in its enforcement efforts
           including increasing the amount of direct enforcement revenue
           collected, number of collection activities undertaken, and
           enforcement staff. Nevertheless, enforcement of the tax laws
           remains high risk, because of the persistence of the tax gap and
           the lack of a data-based plan.^23
		   
^23 [49]GAO-07-310 .
			   
		   IRS Has Taken Some Steps to Improve Enforcement

           IRS reported that direct enforcement revenue rose from $43.1
           billion in FY 2004 to $48.7 billion in FY 2006 (a 13 percent
           increase). As shown in figure 2, most of the enforcement revenue
           is from IRS's collection efforts ($27.5 billion), followed by
           examination ($17.4 billion) and document matching ($3.2
           billion).^24
		   
^24 Document matching is matching the amount of income taxpayers report on
their tax returns to the income amounts reported on information returns it
receives from third parties.		   

Figure 2: IRS Direct Enforcement Revenue, Fiscal years 1997 through 2006
	
Note: Dollars not adjusted for inflation.

In recent testimony, the IRS Commissioner reported increases in some
enforcement activities; for example, he reported that the overall
percentage of individual income tax returns examined between FYs 2001 and
2006 increased by about 75 percent. IRS's 2008 budget request shows that
enforcement goals are comparable or slightly greater than 2006 actual
performance and 2007 planned performance; for example, the examination
rate of all individual income tax returns will remain at 1 percent. Also,
IRS is proposing to increase document matching activities for individual
taxpayers and increase examinations for businesses.

With its 2008 budget, IRS is proposing to roughly maintain its skilled
enforcement staff at the FY 2006 level--just over 21,000 FTEs. This would
be an increase of over 8 percent since its low in FY 2003, as shown in
figure 3. However, it is 9 percent less than the skilled enforcement staff
that IRS had in FY 1998. IRS has three main categories of skilled
enforcement staff: revenue officers, who perform field collection work;
revenue agents, who examine complex returns; and special agents, who
perform criminal investigations.

Figure 3: Revenue Agents, Revenue Officers, and Special Agents, Fiscal
years 1998 through 2008

Despite the projections for skilled enforcement staffing, officials from
the SB/SE and Large and Mid-Size (LMSB) divisions noted that even
maintaining skilled enforcement staff levels may be difficult because both
divisions are experiencing high attrition rates because of retirements.
Furthermore, officials said the 2007 continuing resolution limited their
ability to hire in 2007. SB/SE and LMSB officials noted that the delays in
hiring may have an adverse affect on their ability to meet performance
goals in 2008 and beyond, particularly for the most complex examination
issues, including abusive tax shelters and corporate returns, because of
the lead time needed to train and develop staff.

Recently, IRS studied individual taxpayer compliance through the NRP, and
used the resulting compliance data to estimate the tax gap for individual
income tax underreporting and the portion of employment tax underreporting
attributed to self-employment taxes for tax year 2001. NRP, which involved
reviewing around 46,000 individual tax returns, has yielded new
information on taxpayer compliance for the first time since IRS's previous
compliance measurement study was undertaken for tax year 1988.

As a result of NRP, IRS has taken steps to better ensure efficient
allocation and use of its enforcement resources. For example, the NRP
study has provided better data on which taxpayers are most likely to be
noncompliant. IRS is using the data to improve its audit selection
processes in hopes of reducing the number of audits that result in no
change, which should reduce the unnecessary burden on compliant taxpayers
and increase enforcement staff productivity.

Enforcement of the Tax Laws Remains High Risk

Despite the progress in enforcement, enforcement of the tax laws remains
on our high risk list because of the persistence of the tax gap and, among
other things, the lack of a data-based plan to address it.^25

The tax gap has been a persistent problem in spite of a myriad of
congressional and IRS efforts to reduce it, as the rate at which taxpayers
voluntarily comply with our tax laws has changed little over the past
three decades. The rate at which taxpayers pay their taxes voluntarily and
on time has tended to range from around 81 percent to around 84 percent.
IRS's most recent estimates of the gross tax gap are $345 billion for tax
year 2001, and the net tax gap is estimated to be $290 billion. IRS's
overall approach to reducing the tax gap consists of enhancing enforcement
and improving taxpayer service. IRS uses its enforcement authority to
ensure that taxpayers are reporting and paying the proper amounts of taxes
through efforts such as examining tax returns and document matching. IRS
seeks to improve voluntary compliance through efforts such as education
and outreach programs and tax form simplification.

IRS needs better, more continuous compliance research and better
measurements of compliance. We have long been a supporter of such
research, because it can give IRS and Congress an important measure of
taxpayer compliance and it allows IRS to better target enforcement
resources towards noncompliant taxpayers. Taxpayers benefit as well,
because properly targeted audits mean fewer audits of compliant taxpayers
and more confidence by all taxpayers that others are paying their fair
share. IRS's budget request includes $41 million for improving tax gap
estimates and detecting noncompliance including for a rolling NRP sample
of individual taxpayers and a dedicated cadre of examiners to conduct
audits. Using a rolling sample, IRS plans to replicate the 2001 NRP study
by conducting audits of a smaller sample size instead of larger
intermittent efforts. At the end of 5 years, IRS would have a comparable
set of results to the 2001 study and continue to update the study annually
by sampling the same number of taxpayers, dropping off the oldest year in
the sample, and adding the new years' results every year. While we have
concerns about the lack of basic information to justify the specific
funding requested, we generally support this approach. We have previously
reported that doing compliance studies once every few years does not give
IRS or others information about what is happening in the intervening
years, and a rolling sample should reduce costs by eliminating the need to
plan entirely new studies every few years or more and train examiners to
carry them out.^26

25 [50]GAO-07-488T .

IRS also needs a data-based plan to reduce the tax gap. Congress has been
encouraging IRS to develop an overall tax gap reduction plan or strategy
that could include a mix of approaches like simplifying code provisions,
increased enforcement, and reconsidering the level of resources devoted to
enforcement. Some progress has been made toward laying out the broad
elements of a plan or strategy for reducing the tax gap. On September 26,
2006, the U.S. Department of the Treasury, Office of Tax Policy, released
"A Comprehensive Strategy for Reducing the Tax Gap." However, the document
generally does not identify specific steps that Treasury and IRS will
undertake to reduce the tax gap, the related time frames for such steps,
or explanations of how much the tax gap would be reduced. In a recent
hearing, the Chairman of the Senate Finance Committee asked the Secretary
of the Treasury for a more detailed plan by July 2007.

^26 [51]GAO-06-499T, [52]GAO-05-753, and [53]GAO-05-527T .

IRS's Filing Season Performance Is Improved in Some Areas with Challenges in
Others, and the Effect of Tax System Changes Has Been Minimal

IRS's key filing season efforts are processing electronic and paper
individual income tax returns and issuing refunds, as well as providing
assistance or services to taxpayers. As already noted, processing and
assistance were complicated this year by three tax system changes: TETR,
the split refund option, and enactment in December 2006 of tax law
changes.

Returns Processing Is Comparable to Last Year, Despite Delays with CADE and
Implementation of Tax System Changes

From January 1 through April 20, 2007, IRS processed approximately 104.6
million individual income tax returns, about the same number as last year,
and issued 88.2 million refunds for $203 billion compared to 85.2 million
refunds for $190.5 billion at the same time last year. Over 65 percent of
all refunds were directly deposited into taxpayers' accounts, up 3.5
percent over the same time last year. Direct deposits are faster and more
convenient for taxpayers than mailing paper checks. IRS recently granted
some extensions to taxpayers, including those affected by a major storm
and those unable to file their returns because of a software company's
server problems.

According to IRS data and officials, performance is comparable to last
year. IRS is meeting most of its performance goals, including deposit
error rate, which is the percentage of deposits applied in error, such as
being posted to the wrong tax year. Groups and organizations we spoke
with, including the National Association of Enrolled Agents, the American
Institute of Certified Public Accountants, and large tax preparation and
tax preparation software companies, corroborated IRS's view that filing
season performance is comparable to last year.

  CADE Will Expedite Refunds for Millions of Taxpayers, but Delays in
  Implementation Caused Millions More Not to Benefit

IRS uses two systems for posting taxpayer account information--the
antiquated Master File legacy system and CADE. The latest release of CADE
became operational in early March, 2 months behind schedule because of
problems identified during testing. IRS originally planned to post 33
million taxpayer returns by CADE, more than four times the 7.4 million
posted by CADE last year. We reported in early April that IRS had revised
this estimate down to approximately 17-19 million taxpayer returns.
However, as of April 20, IRS has posted fewer tax returns than
expected--9.1 million--with the remainder being posted to the Master File
legacy system. This means that millions of taxpayers did not benefit from
faster CADE processing this year. Taxpayers eligible for a refund this
year whose returns are posted by CADE will benefit from CADE's faster
processing, receiving their refunds 1-5 days faster for direct deposit and
4-8 days faster for paper checks than if their return had been processed
on the legacy system. The CADE setback may impact IRS's ability to deliver
the expanded functionality of future versions of CADE, thus delaying the
transition to the new processing system (discussed further in the BSM
section of this testimony).

  Electronic Filing Is Higher Than Last Year Despite a Decline in the Free File
  Program

The rate of electronic filing is up compared to the same period last year.
As of April 20, over 72.6 percent of all individual income tax returns
(75.9 million) were filed electronically, up 8.5 percent over the same
time last year.

We previously reported that state mandates for electronic filing of state
tax returns also encourage electronic filing of both state and federal tax
returns, and last year, we suggested that Congress consider mandating
electronic filing by paid tax preparers meeting criteria, such as a
threshold for number of returns filed.^27 Last year, electronic filing of
federal returns increased 27 percent for the three states (New York,
Connecticut and Utah) with new 2006 mandates. This year, state mandates
are likely to continue to show a positive effect on federal electronic
filing because, with the addition of West Virginia, 13 states now have
state mandates.

Compared to processing paper returns, electronic filing reduces IRS's
costs by reducing staff devoted to processing. In 2006, IRS used almost
1,700 (36 percent) fewer staff years for processing tax returns than in
1999, as shown in figure 4. IRS estimates this saved the agency $78
million in salary, benefits, and overtime in 2006. Electronic filing also
improves service to taxpayers. Returns are more accurate because of
built-in computer checks and reduced transcription errors (paper returns
must be transcribed in IRS's computers--a process that inevitably
introduces errors). Electronic filing also provides faster refunds.

^27 See [54]GAO-07-27 , [55]GAO-05-753 , and [56]GAO-05-527T.

Figure 4: Number of Individual Returns and IRS Staff Years for Individual
Paper and Electronic Processing, Fiscal years 1999 through 2008

Notes: Staff years and full-time equivalents (FTE) are units of
measurement that are often used interchangeably; however, a staff year
includes overtime. Therefore, the cost of one staff year is equal to the
cost of one FTE plus overtime. Projections for 2007 do not include Form
1040 EZ-Ts.

Although electronic filing continues to grow, taxpayers' use of the Free
File program continues to decline.^28 The Free File program, accessible
through IRS's Web site, is an alliance of companies that have an agreement
with IRS to provide free on-line tax preparation and electronic filing on
their Web sites for taxpayers below an adjusted gross income ceiling of
$52,000 in 2007. About 95 million (70 percent) of all taxpayers are
eligible for free file. Under the agreement, companies are not allowed to
offer refund anticipation loans and checks, or other ancillary products,
to free file participants. Although IRS has increased its marketing
efforts, the agency has not been successful in increasing free file use.
As of April 19, 2007, IRS processed about 3.7 million free file
returns--less than 4 percent of eligible taxpayers and a decrease of 2.2
percent from the same period last year. IRS officials attributed this
decline in part to companies offering free electronic on-line filing
separate from the Free File program. While all 19 companies participating
in the Free File program allow for TETR requests, only 3 of the 19
companies offer Form 1040 EZ-T requests.^29

28 IRS does not have the capability to receive electronic returns directly
from taxpayers. Taxpayers can electronically file their returns by using a
paid tax preparer, commercial tax preparation software, or the Free File
program. Paid preparers and tax preparation software companies may charge
for the service.

  Tax System Changes Have Had Less Impact on Returns Processing Than Projected

TETR and split refund volume has been less than IRS projected. Over 68
percent of individuals who filed returns through April 14 have requested
the TETR, although all who paid the excise tax were eligible for the
refund. IRS projected that 10 to 30 million individuals who did not have a
tax filing obligation could claim TETR. As of April 13, approximately
578,000 of this group have asked for a refund (3.4 percent of the 17.1
million IRS expected by this time).^30

As of April 21, just over 77,000 individual taxpayers chose to split their
refunds into different accounts, which represent a small fraction of the
57.2 million taxpayers who had their refunds directly deposited and the
3.8 million split refunds IRS projected for the filing season.

IRS delayed processing a small number of returns claiming tax extender
provisions until February 3 to complete changes to its tax processing
systems. IRS has anticipated some problems due to the late passage of
extender provisions which prevented information about them included in
printed tax publications.

Finally, in order to minimize problems, IRS planned and prepared
extensively for this year's primary tax system changes: TETR, split
refund, and tax law extenders. For example, IRS updated forms and created
new ones, hired and trained additional staff to handle potential volume of
TETR and split refund requests, and updated the Web site and tax systems.
As reported in App. 1, of the tax systems changes, only TETR created new
compliance concerns for IRS and IRS modified its plans to address those
concerns during the filing season.

^29 Individuals who do not normally file tax returns but paid the tax can
request the refund on Form 1040EZ-T (Request for Refund of Federal
Telephone Excise Tax).

^30 We are in the process of obtaining additional information to evaluate
IRS projections on TETR and split refund volumes.

Call Volume Continues to Decline, IRS is Meeting Goals and Performance Is
Comparable to Last Year

The number of calls to IRS's toll-free telephone lines has been less than
last year and is significantly less for automated calls than in 2002 (see
table 3). Similar to last year, IRS assistors answered over 40 percent of
the total calls, while the rest of the calls were answered by an automated
menu of recordings.

Table 3: IRS Telephone Volume, 2002 through 2007

Volume in thousands                                                        
                                      2002   2003   2004   2005   2006   2007 
Telephone assistance^a                                                     
Total calls                      51,148 40,805 41,647 33,935 31,540 30,260 
Answered by assistors            14,799 14,987 15,915 14,804 13,709 13,506 
Answered by automated menu of                                              
recordings                       36,349 25,818 25,732 19,132 17,831 16,754 

Source: IRS.

aTelephone assistance data are based on the following date ranges: January
1 to April 20, 2002, January 1 to April 19, 2003, January 1 to April 17,
2004, January 1 to April 16, 2005, January 1 to April 15, 2006, and
January 1 to April 14, 2007.

By one measure of access, IRS's performance is somewhat better and for
another it is somewhat worse than this time last year. Taxpayers' ability
to access IRS's toll-free telephone lines is somewhat better than last
year, and IRS is meeting its annual goals.^31 According to IRS officials,
IRS does not try to match previous years' performance, but sets and tries
to achieve performance goals according to the budget received. As shown in
table 4, the percentage of taxpayers who attempted to reach an assistor
and actually got through and received services--referred to as the level
of service--was one percentage point higher than the same time period last
year and greater than IRS's goal of 82 percent for both FYs 2006 and 2007.
Average speed of answer, which is the length of time taxpayers wait to get
their calls answered, is just under 4 minutes, almost 15 percent longer
than last year, but better than IRS's annual goal of 4.3 minutes.

^31 Earlier this year, we reported that IRS's telephone access was
somewhat less than last year. Since that time, IRS's performance has
improved. See [57]GAO-07-720T .

IRS estimates that the accuracy of telephone assistors' responses to tax
law and account questions to be comparable to the same time period last
year by using a statistical sampling process. IRS officials noted that
there was unprecedented hiring for FY 2007, and while every employee
working tax law applications completes a requisite certification process,
new employees will be less productive than experienced employees. IRS has
implemented several initiatives, such as targeted monitoring and training,
to assist the new hires.

Table 4: IRS Telephone Performance, 2002 through 2007

                               2002        2003    2004    2005   2006   2007 
Telephone                                                                  
performance-access^a                                                       
Assistor level of            67%         82%     85%     82%    83%    84% 
service^b                                                                  
Average speed of answer      4.2         2.9     3.1     4.3    3.4    3.9 
(in minutes)^c                                                             
Telephone                                                                  
performance-accuracy^d                                                     
Accounts customer         89.28%      89.10%  89.28%  91.59% 92.95% 93.00% 
accuracy rate estimates      +/-   +/-   +/- 0.6%    +/- +/- 0.5% +/- 0.7%
                               0.7%  0.5%              0.5%            
Tax law customer accuracy 84.04%      82.00%  77.72%  88.18% 90.03% 89.37% 
rate estimates               +/-   +/-  +/- 1.02%    +/- +/- 0.8% +/- 1.2%
                               0.5%  0.8%              0.8%            

Source: IRS.

aTelephone performance access data are based on the following date ranges:
January 1 to April 20, 2002, January 1 to April 19, 2003, January 1 to
April 17, 2004, January 1 to April 16, 2005, January 1 to April 15, 2006,
and January 1 to April 14, 2007.

bAssistor level of service is the percentage of taxpayers who wanted to
talk with an assistor and actually got through and received services.

cThe number of minutes a taxpayer waits in queue to speak with an
assistor.

dBased on a representative sample estimate at the 90 percent confidence
interval for January, February, and March 2006 and 2007. The percentage of
calls in which telephone assistors provided accurate answers for the call
type and took the appropriate action.

IRS officials reported that tax system changes have had minimal impact on
telephone operations so far this filing season. TETR-related calls are a
small fraction of the TETR calls that IRS projected and all calls that IRS
received. Between January 1 and April 14, 2007, IRS expected 12.4 million
TETR-related calls, but received about 540,000.

IRS hired 650 FTEs in FY 2007, with the expectation that those hires would
be used to cover anticipated attrition in 2008. Their first assignment was
answering TETR telephone calls and they also were trained to handle other
accounts calls allowing more experienced employees to address paper
inventory.^32

IRS anticipated little impact on telephone service from the split refund
option and tax provision extenders. For split refunds, IRS anticipated it
would receive about 70,000 calls to assistors compared to the 70 million
total calls it receives each year. IRS did not have projections for tax
provision extensions.

Use of Web Site Applications Continues to Increase, and Performance Remains High

Use of IRS's Web site has increased so far this filing season compared to
prior years except for downloads of forms and publications. From January 1
through March 31, IRS's Web site was visited more often and the number of
searches increased over the same time period as last year. However, the
number of downloaded forms and publications has decreased 22 percent over
the same period compared to last year. According to IRS officials, reasons
for this decrease include the increase in taxpayers using e-file, tax
preparation software, and paid preparers, negating the need for taxpayers
to download and print forms and publications. In terms of new features,
IRS added a state deduction calculator this filing season, which IRS wants
to use as a new standard for developing other on-line calculators. Web
site assistance is important because it is available to taxpayers 24-hours
a day and it is less costly to provide than telephone and walk-in
assistance.

^32 In addition to answering telephones, IRS's telephone assistors also
work on paper correspondence, such as amended returns. According to IRS
officials, staff is working on more paper correspondence than anticipated.
From October 1, 2006, through April 14, 2007, receipts of paper inventory
were up about 5 percent and IRS had closed 11 percent more paper inventory
than at the same time period last year.

Table 5: IRS Web Site Use, 2006 and 2007 (data are in thousands)

Uses                              2006    2007 Percentage change 
Visits^a                        95,406 103,775               8.8 
Downloads^a                     89,789  70,041             -22.0 
Searches^a                      52,519  60,145              14.5 
Where's My Refund^b             25,350  31,995              26.2 
Number of TETR-related visits^c    N/A   4,013               N/A 

Source: GAO analysis of IRS data.

Note: N/A means not applicable.

aWeb site visits and searches and downloads from January, February, and
March 2006 and 2007. A visit begins when a visitor views their first page
on IRS.gov, and ends when the visitor leaves the site. A visit is not a
count of the number of unique individuals who have accessed the site.

bFor January 1 through April 22, 2006, and April 21 2007.

cVisits to a Web page specific to TETR, which was not operational in 2006.
Data are for October 1, 2006, through April 7, 2007.

In addition to the Free File program, IRS's Web site offers several
important features, such as "Where's My Refund", which allows taxpayers to
check on the status of their refunds. This year, the feature allows
taxpayers to check on the status of split refunds, and tells the taxpayer
if one or more of the deposits were returned from the bank because of an
incorrect routing or account number. However, for certain requests, the
feature is not useful. For example, IRS stopped some refunds related to
TETR requests, but "Where's My Refund" informed taxpayers that their
refunds had been issued. Further, if taxpayers make a mistake calculating
the amount of their refund the feature would indicate that IRS corrected
the refund amount, but will not show the new amount. IRS is considering
providing more information about taxpayer accounts on its Web site as part
of its strategy to improve taxpayer services at reduce costs.

There is further evidence that IRS's Web site is performing well as these
examples show.

           o According to the American Customer Satisfaction Index, for
           January through March 2007, IRS's Web site is scored above those
           of other government agencies, nonprofits, and private sector firms
           for customer satisfaction. For example, in March, IRS scored 74
           versus 72 for all government agencies surveyed and 71 for all Web
           sites surveyed.^33

           o An independent weekly study by Keynote, a company that evaluates
           Web sites, reported that, as of April 9, 2007, IRS's Web site has
           repeatedly ranked in the top 6 out of 40 government agency Web
           sites evaluated in terms of average download time. Last year, IRS
           consistently ranked second for the same time period. Average
           download time remained about the same for IRS compared to last
           year, indicating that IRS is not performing worse, but that other
           government agencies are performing better.

           o On the basis of our own searches, we found IRS's Web site to be
           readily accessible, easy to navigate, and easy to search.
		   
		   Limited Data on the Quality of Face-to-Face Assistance Show
		   Improvement, but Concerns Remain


           As of April 14, approximately 2.9 million taxpayers used IRS's 401
           walk-in sites, which is comparable to the same period last year.
           Figure 5 shows the trend in walk-in site use for the filing season
           including slight projected declines in 2007 and 2008. At walk-in
           sites, staff provide taxpayers with information about their tax
           accounts, answer a limited scope of tax law questions about, for
           example, income and filing status, and provide limited tax return
           preparation assistance.^34 As of April 14, over 10,700 taxpayers
           have requested TETR on Form 1040EZ-T at walk-in sites, which is
           8.5 percent of the 126,000 individuals IRS expected.

^33 The American Customer Satisfaction Index tracks trends in customer
satisfaction and is considered to be an industry leader.

^34 IRS provides limited return preparation assistance to those who meet
an IRS-specified income requirement that approximates the amount for
claiming the Earned Income Tax Credit or less than $39,000.

Figure 5: Assistance Provided at IRS Walk-in Sites and Volunteer Sites,
2001 - 2008 (contacts in millions)

Notes: "Other walk-in contacts" includes assistance for account notices,
tax law inquiries, forms, and compliance work, but not return preparation.
For the walk-in sites, the time periods covered are December 31, 2000,
through April 28, 2001; December 30, 2001, through April 27, 2002;
December 29, 2002, through April 26, 2003; December 28, 2003, through
April 24, 2004; and December 26, 2004, through April 23, 2005. For
volunteer sites, the time period covered for 2001 is January 1, 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;
December 26, 2004, through April 23, 2005; and January 1, through April
23, 2006.

aFiscal years 2007 and 2008 are IRS projections. For walk-in sites,
projections cover the time periods of December 31, 2006, through April 21,
2007, and December 30, 2007, through April 19, 2008. For volunteer sites,
projections cover the time periods from January 1 through April 30, 2007
and 2008. For volunteer sites, projections cover the time periods from
October 1 through September 30 for 2007 and 2008. According to IRS, most
taxpayers having their returns prepared at volunteer sites do so during
the filing season, which is from January 1 through April 30.

IRS officials attribute this year's projected decline in walk-in use to
taxpayers' increased use of tax preparation software and IRS.gov. This
decline has allowed IRS to devote 2.3 percent fewer FTEs compared to last
year for walk-in assistance (down from 260 to 266 FTEs).

Volunteer sites, often run by community-based organizations and staffed by
volunteers who are trained and certified by IRS, do not offer the range of
services provided at walk-in sites. Instead, volunteer sites focus on
preparing tax returns primarily for low-income and elderly taxpayers and
operate chiefly during the filing season. As of April 15, the number of
taxpayers getting return preparation assistance at over 11,000 volunteer
sites has increased to approximately 2.3 million, up 16 percent from last
year and continuing a trend since 2001. Although no projections have been
made for TETR claims, over 80,600 taxpayers have claimed this credit at
these locations. We have reported that the shift of taxpayers from walk-in
to volunteer sites 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.

While IRS is collecting better data on the quality of service at walk-in
sites, concerns about quality of the data and service remain. According to
IRS, it is measuring the accuracy of tax law and accounts assistance. IRS
has reported a goal for tax law accuracy, and plans to use data collected
for 2007 to set an annual goal for accounts accuracy.^35 While IRS
provided return assistance for almost 210,000 taxpayers, it lacks
information on the accuracy of that assistance. For volunteer sites, as of
April 12, for a small non-statistical sample, IRS reported a 64 percent
accuracy rate for return preparation, compared to its goal of 55 percent.
Independent from IRS, but using similar methods, TIGTA showed a 56 percent
accuracy rate.

TAB is Intended to Improve Taxpayer Services in a Cost-effective Manner

IRS developed TAB to provide the agency with information on taxpayers'
needs and preferences to improve taxpayer service at lower cost as part of
a 5-year plan, in response to a November 2005 law and a congressional
directive.^36 IRS notes that with TAB, it has more information than ever
before about taxpayers, partners, employees, and the effect of
service-related decisions on taxpayers to help the agency provide,
evaluate, and improve services.

IRS issued two reports under TAB:

^35 As of April 14, IRS reported tax law and accounts assistance accuracy
rates of 76 and 84 percent respectively at its walk-in sites. However,
because IRS could not provide confidence intervals for these estimates, we
do not know how precise these estimates are and, whether the tax law
accuracy rate of 76 percent would achieve the goal if a confidence
interval were considered.

^36 Pub. L. No. 109-115, S 205 (2005) and H. Rep. No. 109-307, 109th Cong.
(2005).

           o The Phase I report, released in April 2006, outlines the results
           of preliminary research on taxpayer expectations and establishes
           five strategic themes for improving taxpayer services.^37

           o Phase II, released in April 2007, includes the results of
           additional research, numerous areas and initiatives both funded
           and unfunded for service improvement, and a set of recommended
           performance measures.

           IRS has identified 54 initiatives, some of which are underway,
           that include taxpayer service upgrades such as improvements to the
           Spanish version of "Where's My Refund" and research studies. IRS
           identified 28 of the initiatives as unfunded and included several
           as part of its FY 2008 budget request as noted above.

           As part of its strategy, IRS developed estimates of the cost per
           service contact for providing different types of taxpayer
           services, although there were qualifications to those
           estimates.^38 As table 6 indicates some assisted services, such as
           e-mail, are far more expensive than self-assisted services, such
           on IRS's Web site. However, while there may be some overlap in
           services (e.g., taxpayers can receive similar return assistance at
           both walk-in sites and volunteer sites), they are likely to serve
           different taxpayers and may provide different levels of service
           (e.g., taxpayers can receive account assistance at walk-in sites,
           but not at volunteer sites). But, even between the two
           self-assisted options, there is a difference in unit costs, with
           automated phone calls estimated to be more than five times higher
           than Web contacts. Having reliable cost information, together with
           a better understanding of taxpayers' preferences, needs, and
           expectations, could assist IRS in determining whether it could
           provide taxpayers with the same taxpayer service benefits at a
           lower cost through alternative methods. However, to further
           evaluate IRS's strategy, additional information would be required,
           for example, on how savings estimates were developed.
		   
^37 These themes are (1) improve and expand taxpayers' education and
awareness; (2) optimize IRS's use of partner services (e.g., paid
preparers and community-based organizations); (3) elevate self-service
options, such as IRS's Web and automated phone assistance; (4) improve and
expand IRS's employee training and support tools; and (5) develop
short-term performance and long-term outcome goals and metrics.

^38 IRS qualified these estimates noting that they fall short of the cost
per contact estimates being developed for its Integrated Financial System
because they do not fully allocate all indirect overhead and support
costs. From our perspective, it would be important to know more about the
indirect and support cost to see if they might significantly change the
cost estimates. Further, according to IRS, these estimates represent the
average costs per contact rather than the marginal costs per contact,
which could be significant lower due to the unused capacity and the fixed
costs associated with many forms of services. Moreover, we previously
commented that because of long-standing limitations in IRS's cost
accounting capability, cost data at this detailed level have not been
audited (see, for example, [98]GAO-07-310 and 07-247).

It is our determination that IRS is a competent source for these cost
estimates and that they seem to be reasonable; therefore, we have
determined these estimates to be sufficiently reliable for describing how
IRS could potentially use the information to improve taxpayer service at a
lower cost.		   

           Table 6: IRS's Fiscal Year 2005 Estimated Unit Costs
		   
Service                                         Estimated cost per contact 
Answering tax law questions via E-mail                              $52.51 
Providing assistance at walk-in sites                                28.73 
Answering correspondence                                             24.97 
Providing assistance by assistors via toll-free                            
telephones                                                           19.46 
Providing assistance through VITA sites                              12.01 
Providing assistance by automation via                                     
toll-free telephones                                                  0.71 
Providing assistance such as downloads and                                 
searches on IRS's Web site                                            0.13 

           Source: IRS.
		   
		   Progress Made in BSM Implementation, but Challenges and Risks
		   Remain

           BSM is critical to supporting IRS's taxpayer service and
           enforcement goals and reducing the tax gap. For example, BSM
           includes projects to allow taxpayers to file and retrieve
           information electronically and to provide technology solutions to
           help reduce the backlog of collections cases. 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.

           Over the past year, IRS has made further progress in implementing
           BSM projects and in meeting cost and schedule commitments, but two
           key projects experienced significant cost overruns during
           2006--CADE and Modernized e-File. During 2006 and the beginning of
           2007, IRS deployed additional releases of the following modernized
           systems that have delivered benefits to taxpayers and the agency:
           CADE, Modernized e-File, and Filing and Payment Compliance (a tax
           collection case analysis support system). Each of the five
           associated project segments that were delivered during 2006 were
           completed on time or within the targeted 10 percent schedule
           variance threshold, and two of them were also completed within the
           targeted 10 percent variance threshold for cost. However, one
           segment of the Modernized e-File project as well as a segment of
           the CADE project experienced cost increases of 36 percent and 15
           percent, respectively. According to IRS, the cost overrun for
           Modernized e-File was due in part to upgrading infrastructure to
           support the electronic filing mandate for large corporations and
           tax-exempt organizations, which was not in the original
           projections or scope.

           IRS has also made significant progress in implementing our prior
           recommendations and improving its modernization management
           controls and capabilities, including efforts to institutionalize
           configuration management procedures and develop an updated
           modernization vision and strategy and associated 5-year plan to
           guide information technology investment decisions during fiscal
           years 2007 through 2011. 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 address our prior recommendation of
           developing a long-term vision and strategy for completing the BSM
           program, including establishing time frames for consolidating and
           retiring legacy systems. IRS recognizes this and intends to
           conduct further analyses and update its vision and strategy to
           address the full scope of tax administration functions and provide
           additional details and refinements on the agency's plans for
           legacy system dispositions.

           Future BSM project releases continue to face significant risks and
           issues, which IRS is taking steps to address. IRS has reported
           that significant challenges and risks confront its future planned
           system deliveries. For example, delays in deploying the latest
           release of CADE to support the current filing season have resulted
           in continued contention for key resources and will likely impact
           the design and development of the next two important releases,
           which are planned to be deployed later this year. The potential
           for schedule delays, coupled with the reported resource
           constraints and the expanding complexity of the CADE project,
           increase the risk of scope problems and the deferral of planned
           functionality to later releases. Maintaining alignment between the
           planned releases of CADE and the new Accounts Management Services
           project is also a key area of concern because of the functional
           interdependencies.^39 The agency recognizes the potential impact
           of these project risks and issues on its ability to deliver
           planned functionality within cost and schedule estimates and, to
           its credit, has developed mitigation strategies to address them.
           We will, however, continue to monitor the various risks IRS
           identifies and the agency's strategies to address them and will
           report any concerns.

           IRS has also made further progress in addressing high-priority BSM
           program improvement initiatives during the past year, including
           efforts related to institutionalizing the Modernization Vision and
           Strategy approach and integrating it with IRS's capital planning
           and investment control process, hiring and training 25 entry-level
           programmers to support development of CADE, developing an
           electronic filing strategy through 2010, establishing requirements
           development/management processes and guidance (in response to our
           prior recommendation), and defining governance structures and
           processes across all projects. IRS's high-priority improvement
           initiatives continue to be an effective means of assessing,
           prioritizing, and incrementally addressing BSM issues and
           challenges. However, more work remains for the agency to fully
           address these issues and challenges.

           In addition, we recently reported that IRS could improve its
           reporting of progress in meeting BSM project scope (i.e.,
           functionality) expectations by including a quantitative measure in
           future expenditure plans.^40 This would help to provide Congress
           with more complete information on the agency's performance in
           implementing BSM project releases. IRS recognizes the value of
           having such a measure and, in response to our recommendation, is
           in the process of developing it.
		   
^39Accounts Management Services (AMS) is a strategic project intended to
deliver improved customer support and functionality by leveraging existing
IRS applications and new technologies to bridge the gap between
modernization initiatives, such as CADE, and legacy systems. AMS is to
enhance CADE by providing applications for IRS employees and taxpayers to
access, validate, and update accounts on demand. The development and
implementation of the AMS project is also essential to enabling CADE to
accept more complicated tax returns and to deal with taxpayer issues. AMS
project releases are to provide functional components synchronized with
the CADE development schedule as well as other components delivered
independent of the CADE schedule.

^40 [99]GAO-07-247 .

Conclusions

           IRS's budget submission is important because it shows the resource
           tradeoffs IRS intends to make between enforcement and taxpayer
           service--both of which have potential to reduce the tax gap. One
           way that IRS reallocates resources is through new spending
           initiatives. However, in order for Congress and other external
           parties to assess the merits of new initiatives, basic information
           about the description of the initiatives and their costs and
           expected performance is necessary. Without such information,
           decisions makers do not have an informed basis on whether to
           approve and fund new initiatives. Of course, the costs of
           developing justifications must also be taken into account. More
           costly initiatives generally would be expected to have more
           detailed justifications.
		   
		   Recommendation for Executive Action

           We recommend that the Commissioner of Internal Revenue

           o have available basic descriptive, cost, and expected performance
           information on the spending initiatives proposed in the 2008
           budget submission to the extent to such information has not been
           provided, and

           o include in future budget submissions, basic descriptive, cost,
           and performance information on new spending initiatives, with
           supplementary documentation available if needed.

           In comments on a draft of this statement, IRS's Chief Financial
           Officer agreed with the second recommendation, but not the first.
           She stated that the FY 2008 budget and justification did provide
           basic descriptive, cost, and expected performance information for
           each initiative. IRS agreed that the amount of performance data
           provided for each initiative varied, stating that some of the
           initiatives did not necessarily merit such performance indicators
           and, for those initiatives, IRS provided explanations of general
           benefits or reasons behind the request. While we agree that for
           every initiative IRS provided the total proposed spending, some
           initiatives lacked basic information on how the amount to be spent
           was determined and work to be done. For example, the initiative
           for improving compliance estimates provided no explanation of how
           the 258 FTEs were determined or basic information on the work such
           as the number of examinations to be conducted. Without such
           information, at the end of the fiscal year, Congress would be
           unable to tell whether IRS spent the money as intended.

           Mr. Chairman, this concludes my prepared statement. Mr. Powner and
           I would be happy to respond to questions you or other members of
           the Committee may have at this time.
		   
		   Contacts and Acknowledgments

           For further information regarding this testimony, please contact
           James R. White, Director, Strategic Issues, on 202-512-9910 or
           [email protected] or David A. Powner, Director, Information
           Technology Management Issues, on 202-512-9296 or
           [email protected] . Contacts for our Offices of Congressional
           Relations and Public Affairs may be found on the last page of this
           statement. Individuals making key contributions to this testimony
           include Joanna Stamatiades, Assistant Director; Amy Dingler; Evan
           Gilman; Timothy D. Hopkins; Ronald W. Jones; Matthew Kalmuk;
           Varflay Kesselly; Frederick Lyles; Jennifer McDonald; Signora May;
           Paul B. Middleton; Karen O'Conor; Lerone Reid; Sabine R. Paul;
           Cheryl Peterson; Neil Pinney; and Shellee Soliday.
		   
		   Appendix I: IRS Is Addressing TETR Compliance Issues during the
		   Filing Season

           TETR is the only one of the three tax changes that created new
           compliance concerns for IRS (filers could request greater TETR
           amounts than they are entitled to). The split refund option does
           not create compliance concerns for IRS since it relates to the
           accounts into which taxpayers want their refunds deposited rather
           than to complying with tax provisions.^1 Since these provisions
           extending the tax laws already existed, IRS anticipates that any
           compliance concerns for 2006 returns will be the same as for
           previous years.

           IRS developed a plan before the filing season began to audit
           suspected TETR overclaims before issuing refunds. IRS's plan for
           TETR was consistent with good management practices identified in
           previous GAO reports. IRS's plan included appointing an executive,
           developing an implementation plan for TETR that included standard
           amounts that individuals could request, developing a compliance
           plan to select TETR requests for audit, and monitoring and
           evaluating compliance by using real-time data to adjust TETR
           compliance efforts. For example, each week, IRS reviews the
           requests for TETR, selects some for audit, and revises the
           criteria for audit selection as necessary.

           As of April 21, 2007, about 324,000 individuals had requested the
           actual amount of telephone excise tax paid for a total of $128
           million. IRS selected about 3.4 percent of these requests for
           audit, involving about $33 million.^2 IRS has closed 464 of the
           individual audits with the taxpayer agreeing to accept the
           standard amount; it has not completed the remaining individual
           audits. About 346,000 businesses had requested TETR for a total of
           about $161 million. IRS selected over 1,000 for audit, involving
           about $22 million. IRS has closed four business audits. IRS
           reassigned about 77 FTEs from discretionary audits and Earned
           Income Tax Credit audits to conduct TETR audits. Additionally,
           Criminal Investigation has spent 13 FTEs staff on TETR activities
           in 2007.
		   
^1 While there are no compliance concerns, there is a potential for errors
due to taxpayers entering incorrect account numbers on Form 8888 (Direct
Deposit of Refund to More Than One Account) or IRS incorrectly
transcribing the account numbers or the dollar amounts to be deposited
into each account.

^2 According to IRS officials, as of May 2, 2007, only individuals
claiming the actual amount of telephone excise tax paid have been selected
for audit. None claiming the standard amount were selected for audit.
Individuals can claim a standard amount ranging from $30 to $60, depending
on the number of exemptions they claim or they can use Form 8913 (Credit
for Federal Telephone Excise Tax Paid) to claim the actual amount paid.

           Appendix II: List of Recent GAO Reports on IRS's Filing Season,
		   Budget, BSM, and Tax Gap

           IRS's Budget and Filing Season

           Tax Filing Season: Interim Results and Updates of Previous
           Assessments of Paid Preparers and IRS's Modernization and
           Compliance Research Efforts, [60]GAO-07-720T Washington, D.C.:
           April 12, 2007.

           Internal Revenue Service: Interim Results of the 2007 Tax Filing
           Season and the Fiscal Year 2008 Budget Request, [61]GAO-07-673
           Washington, D.C.: April 3, 2007.

           Tax Administration: Most Filing Season Services Continue to
           Improve, but Opportunities Exist for Additional Savings,
           [62]GAO-07-27 Washington, D.C.: November 15, 2006

           Internal Revenue Service: Assessment of the Interim Results of the
           2006 Filing Season and Fiscal Year 2007 Budget Request,
           [63]GAO-06-499T Washington, D.C.: April 27, 2006.

           Tax Administration: IRS Improved Some Filing Season Services, but
           Long-Term Goals Would Help Manage Strategic Trade-offs,
           [64]GAO-06-51 Washington, D.C.: November 14, 2005.

           Tax Administration: IRS Improved Performance in the 2004 Filing
           Season, but Better Data on the Quality of Some Services Are
           Needed, [65]GAO-05-67 Washington, D.C.: November 10, 2004.
		   
		   Business Systems Modernization

           Business Systems Modernization: Internal Revenue Service's Fiscal
           Year 2007 Expenditure Plan, [66]GAO-07-247 Washington, D.C.:
           February 15, 2007.

           Business Systems Modernization: IRS Needs to Complete Recent
           Efforts to Develop Policies and Procedures to Guide Requirements
           Development and Management, [67]GAO-06-310 Washington, D.C.: March
           20, 2006.

           Business Systems Modernization: Internal Revenue Service's Fiscal
           Year 2006 Expenditure Plan, [68]GAO-06-360 Washington, D.C.:
           February 21, 2006.

           Business Systems Modernization: Internal Revenue Service's Fiscal
           Year 2005 Expenditure Plan, [69]GAO-05-774 Washington, D.C.: July
           22, 2005.

           IRS Modernization: Continued Progress Requires Addressing Resource
           Management Challenges, [70]GAO-05-707T Washington, D.C.: May 19,
           2005.
		   
		   Tax Compliance

           Tax Compliance: Thousands of Federal Contractors Abuse the Federal
           Tax System, [71]GAO-07-742T Washington, D.C.: April 19, 2007.

           Tax Compliance: Using Data from the Internal Revenue Service's
           National Research Program to Identify Potential Opportunities to
           Reduce the Tax Gap, [72]GAO-07-423R Washington, D.C.: March 15,
           2007.

           Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax
           Gap, [73]GAO-07-488T Washington. D.C.: February 16, 2007.

           Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax
           Gap, [74]GAO-07-391T Washington, D.C.: January 23, 2007.

           Tax Compliance: Challenges to Corporate Tax Enforcement and
           Options to Improve Securities Basis Reporting, [75]GAO-06-851T
           Washington, D.C.: June 13, 2006.

           Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost
           Basis Would Improve Compliance if Related Challenges Are
           Addressed, [76]GAO-06-603 (Washington, D.C.: June 13, 2006).

           Tax Gap: Making Significant Progress in Improving Tax Compliance
           Rests on Enhancing Current IRS Techniques and Adopting New
           Legislative Actions, [77]GAO-06-453T Washington, D.C.: February
           15, 2006.

           Tax Gap: Multiple Strategies, Better Compliance Data, and
           Long-Term Goals Are Needed to Improve Taxpayer Compliance,
           [78]GAO-06-208T Washington, D.C.: October 26, 2005.

           Tax Compliance: Better Compliance Data and Long-Term Goals Would
           Support a More Strategic IRS Approach to Reducing the Tax Gap,
           [79]GAO-05-753 Washington, D.C.: July 18, 2005.

           Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal
           Sustainability but Will Require a Variety of Strategies,
           [80]GAO-05-527T Washington, D.C.: April 14, 2005.

           Compliance and Collection: Challenges for IRS in Reversing Trends
           and Implementing New Initiatives, [81]GAO-03-732T Washington,
           D.C.: May 7, 2003.
		   
		   Miscellaneous

           Tax Administration: Telephone Excise Tax Refund Requests Are Fewer
           Than Projected and Have Had Minimal Impact on IRS Services,
           [82]GAO-07-695 Washington, D.C.: April 11, 2007.

           Taxpayer Service: State Experiences Indicate IRS Would Face
           Challenges Developing an Internet Filing System with Net Benefits,
           [83]GAO-07-570 Washington, D.C.: April 5, 2007.

           Internal Revenue Service: Procedural Changes Could Enhance Tax
           Collections: Enhancing IRS Collection Procedures, [84]GAO-07-26
           Washington, D.C.: November 15, 2006.

           Tax Debt Collection: IRS Needs to Complete Steps to Help Ensure
           Contracting Out Achieves Desired Results and Best Use of Federal
           Resources, [85]GAO-06-1065 Washington, D.C.: September 29, 2006.

           Paid Tax Return Preparers: In a Limited Study, Chain Preparers
           Made Serious Errors, [86]GAO-06-563T Washington, D.C.: April 4,
           2006.

           21st Century Challenges: Reexamining the Base of the Federal
           Government, [87]GAO-05-325SP Washington, D.C.: February 2005.

           High Risk Series: An Update, [88]GAO-07-310 Washington, D.C.:
           January, 2007.

           Tax Administration: Most Taxpayers Believe They Benefit from Paid
           Tax Preparers, but Oversight for IRS is a Challenge, [89]GAO-04-70
           Washington, D.C.: October 31, 2003.

           Tax Administration: IRS Is Implementing the National Research
           Program as Planned, [90]GAO-03-614 Washington, D.C.: June 16,
           2003.

           Tax Administration: IRS Needs to Further Refine Its Tax Filing
           Season Performance Measures, [91]GAO-03-143 Washington, D.C.:
           November 22, 2002.
		   
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Highlights of [101]GAO-07-719T , a testimony before the Subcommittee on
Financial Services and General Government, Committee on Appropriations,
U.S. Senate

May 9, 2007

INTERNAL REVENUE SERVICE

Assessment of the 2008 Budget Request and an Update on 2007 Performance

The Internal Revenue Service's (IRS) budget request shows how IRS intends
to balance spending for enforcement and taxpayer service, including
spending for new initiatives and the Business Systems Modernization (BSM)
program. A combination of enforcement and taxpayer service promotes
compliance with the tax laws. GAO was asked to (1) compare IRS's proposed
FY 2008 budget to prior years' and assess how the new spending initiatives
are justified, and (2) describe IRS's enforcement, filing season, and BSM
performance.

GAO analyses are based on IRS's 2008 budget submission, supplementary IRS
data, interviews with IRS officials, and prior GAO reports. Some of GAO's
analyses have been reported earlier this year and updated here.

[102]What GAO Recommends

GAO recommends IRS have available basic descriptive, cost, and expected
performance information on all new initiatives and include such
information in future budget submissions. IRS agreed to provide more
information with future budgets, but said it did provide basic information
this year. However, some initiatives lacked any explanation of how the
amount requested or staff needed were determined. Without such
information, Congress would be unable to tell whether IRS spent the money
as intended.

IRS's budget proposes to increase spending by almost 5 percent to

$11.6 billion. The budget proposes shifting a greater proportion of
spending to enforcement, continuing a trend since 2004. IRS projects that
revenue from the new initiatives will have a relatively small impact on
the tax gap--less than one percent of the gap last estimated at $290
billion in 2001. The tax gap is the difference between what taxpayers owe
and voluntarily pay. Justifications for the new initiatives varied with
some lacking descriptive, cost, and expected performance information. For
example, an initiative for improving compliance estimates provided no
information on how the budget and staff needed or work to be done were
determined. Without such information, decision makers do not have an
informed basis for approving and funding the new initiatives.

IRS has made noticeable progress in its enforcement efforts including
increasing the amount of enforcement revenue collected and enforcement
staffing. For example, between FY 2004 and 2006 enforcement revenue
increased 13 percent to $48.7 billion. Nevertheless, enforcement remains
on GAO's high-risk list. The tax gap has been a persistent problem in
spite of efforts to reduce it, as the rate of taxpayers' voluntarily
compliance with the tax laws has changed little over the past three
decades. To better target enforcement resources, IRS has requested funding
to do additional compliance research which GAO has long supported.
Finally, GAO has reported on IRS's lack of a data-based plan to improve
compliance.

Filing season performance in 2007 improved in some areas compared to prior
years', but there have been challenges. As of April 20, IRS processed
about 104.6 million individual income tax returns and issued 88.2 million
refunds. Electronic filing grew, telephone access is somewhat better, and
Web site use continues to grow. However, fewer than 4 percent of eligible
taxpayers used the Free File program. The latest release of Customer
Account Data Engine (CADE), the new tax processing system, was delayed. As
a result, millions of taxpayers did not benefit from CADE's faster
processing of refunds. IRS recently issued its plan, the Taxpayer
Assistance Blueprint, to improve taxpayer service.

Despite progress in implementing BSM projects including for CADE and
improving management controls and capabilities, significant challenges and
serious risks remain. Delays in the latest release of CADE resulted in
continued contention for key resources and will likely impact future
releases. IRS has more to do to address GAO's prior recommendations such
as developing a long-term strategy that would include time frames for
retiring legacy computer systems.

References

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