2007 Tax Filing Season: Interim Results and Updates of Previous  
Assessments of Paid Preparers and IRS's Modernization and	 
Compliance Research Efforts (12-APR-07, GAO-07-720T).		 
                                                                 
The Internal Revenue Service's (IRS) tax filing season		 
performance is a key indicator of how well IRS serves taxpayers. 
This year's filing season was expected to be risky because of tax
system changes, including the telephone excise tax refund (TETR) 
which can be requested by all individuals and entities that paid 
the excise tax. GAO was asked to describe IRS's service to	 
taxpayers so far this filing season (including the impact of this
year's tax systems changes). GAO was also asked to provide	 
updates of previous assessments of the performance of paid tax	 
preparers, IRS's efforts to modernize its information systems,	 
and what IRS is doing to better measure taxpayer compliance. GAO 
compared IRS's filing season performance to prior years' and	 
goals and based analyses of paid preparers, information systems, 
and compliance research efforts on recent reports.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-720T					        
    ACCNO:   A68110						        
  TITLE:     2007 Tax Filing Season: Interim Results and Updates of   
Previous Assessments of Paid Preparers and IRS's Modernization	 
and Compliance Research Efforts 				 
     DATE:   04/12/2007 
  SUBJECT:   Accounting errors					 
	     Customer service					 
	     Federal taxes					 
	     Income taxes					 
	     Noncompliance					 
	     Performance measures				 
	     Quality control					 
	     Tax refunds					 
	     Tax returns					 
	     Taxes						 
	     Agency evaluation					 
	     Program implementation				 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 
	     IRS Customer Account Data Engine Program		 

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GAO-07-720T

   

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

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

               * [3]CADE Will Expedite Refunds for Millions of Taxpayers, but
                 De
               * [4]Electronic Filing is Higher than Last Year, Despite a
                 Declin
               * [5]States' Internet Return Preparation and Electronic Filing
                 Be
               * [6]Tax System Changes Have Had Less Impact on Returns
                 Processin

          * [7]Call Volume Continues to Decline, but Performance Is Mixed
          * [8]Use of Some Web Site Applications Continues to Increase, and
          * [9]Limited Data on the Quality of Face-to-Face Assistance Show
          * [10]IRS Is Addressing TETR Compliance Issues During the Filing S

     * [11]Paid Preparers Play a Major Role in Tax Administration but T
     * [12]Progress Made in BSM Implementation, but Challenges and Risk
     * [13]Continued Research Is Essential to Estimating the Impact of
     * [14]Contacts and Acknowledgments
     * [15]GAO's Mission
     * [16]Obtaining Copies of GAO Reports and Testimony

          * [17]Order by Mail or Phone

     * [18]To Report Fraud, Waste, and Abuse in Federal Programs
     * [19]Congressional Relations
     * [20]Public Affairs

Testimony

Before the Committee on Finance, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST
Thursday, April 12, 2007

2007 TAX FILING SEASON

Interim Results and Updates of Previous Assessments of Paid Preparers and
IRS's Modernization and Compliance Research Efforts

Statement of James R. White
Director
Strategic Issues

Statement of David A. Powner
Director
Information Technology Management Issues

GAO-07-720T

Mr. Chairman and Members of the Committee:

We appreciate this opportunity to support your oversight of the Internal
Revenue Service (IRS) and the broader tax administration system.

The annual tax return filing season is when IRS provides much of its
service to taxpayers. From January through April, IRS will process well
over 100 million individual tax returns and issue refunds, handle tens of
millions of phone queries from taxpayers, and provide forms and answers to
questions for tens of millions of taxpayers on its Web site. Smaller
numbers of taxpayers will be 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 is high risk for several reasons, including
challenges in implementing the new telephone excise tax refund (TETR),
split refund option (refunds can now be directly deposited to up to three
separate accounts), and several tax law extensions that were enacted in
December of 2006.^1

We have reported that IRS has made significant progress improving taxpayer
service since the passage of the IRS Restructuring and Reform Act of 1998
(RRA 98),^2 including increased electronic filing, better access to IRS's
telephone assistors, and more accurate answers to taxpayers' questions.
The progress has been due, in part, to IRS bringing modern information
systems on line. However, we have also described taxpayer service
challenges including the quality of assistance at walk-in and volunteer
sites, delays in some new information systems, and fully implementing our
prior recommendations on the management of systems acquisition and
development.

^1 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.

^2 See, for example, GAO, Tax Administration: IRS Improved Some Filing
Season Services, but Long-term Goals Would Help Manage Strategic
Trade-offs, [21]GAO-06-51 (Washington, D.C.: Nov. 14, 2005), Internal
Revenue Service: Assessment of the Interim Results of the 2006 Filing
Season and Fiscal Year 2007 Budget Request, [22]GAO-06-615T (Washington,
D.C.: Apr. 6, 2006), and Tax Administration: Most Filing Season Services
Continue to Improve, but Opportunities Exist for Additional Savings,
[23]GAO-07-27 (Washington, D.C.: Nov. 15, 2006).

In addition to the IRS, tax administration in the U.S. relies heavily on
the private sector including the paid preparer industry, the tax
preparation software industry, and third parties who withhold taxes or
submit information returns. Last filing season, over 60 percent of returns
were prepared by paid preparers, and another one-fourth use commercial tax
preparation software.

IRS's Business Systems Modernization (BSM) program, a multibillion-dollar,
high-risk, highly complex effort for delivering modern information
systems, is critical to supporting IRS's taxpayer service and enforcement
goals and reducing the tax gap.^3

The ultimate goal of taxpayer service is to help taxpayers understand and
comply with their tax obligations. However, we have reported that IRS
lacks quantitative estimates of the impact of taxpayer service on
voluntary compliance by taxpayers as well as on the impact of enforcement
on compliance. As a necessary first step to gaining more understanding of
the impact of service on compliance, we have strongly supported IRS's
ongoing National Research Program (NRP) to measure compliance and estimate
the tax gap.

As agreed, our statement will describe IRS's service to taxpayers so far
this filing season (including the impact of this year's tax system
changes) and provide updates of previous assessments of the performance of
paid tax preparers in our tax administration system, IRS's ongoing efforts
to modernize its information systems, and what IRS is doing to better
measure taxpayer compliance with the tax laws including the impact of
service on compliance.

To assess IRS's filing season performance for processing, telephones,
face-to-face assistance and its Internet Web site, we obtained and
analyzed IRS's performance and production data and compared it to annual
goals and prior years' performance. Our work also included direct
observations of key filing season operations, and interviews with IRS
officials and external stakeholders.

^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.
IRS estimated the gross tax gap to be $345 billion for tax year 2001.
After late payments by taxpayers and revenue brought in by IRS's
enforcement efforts, the resulting net tax gap is estimated to be $290
billion.

Our work was done primarily at IRS's National Office operating divisions,
the Joint Operations Center in Atlanta, Ga. and processing centers and
call sites in Atlanta, Ga. and Andover, Ma. We reviewed relevant external
documentation, our reports, and reports of the Treasury Inspector General
for Tax Administration (TIGTA). Our analyses of Internet return
preparation and electronic filing options, TETR compliance, BSM, and NRP
is based upon the results of our recent reports.^4 We reviewed IRS's
efforts to address our prior year recommendations related to our annual
filing season, paid preparer, and BSM work.

In past work, we assessed IRS's filing season performance data. We
considered filing season performance measures and data to be objective and
reliable based on our prior work. Since sources and procedures for
producing this year's data have not significantly changed from prior
years, we determined that the data were sufficiently reliable for the
purposes of this report. Data limitations are discussed where appropriate.
We performed our work from December 2006 through March 2007 in accordance
with generally accepted government auditing standards.

In summary, we make the following major points:

           o IRS's interim filing season performance is improved in some
           areas, although there have been challenges. As of March 30, 2007,
           IRS had processed 76.8 million individual income tax returns and
           issued over 68 million refunds, about the same number as last
           year. The number of returns filed electronically was almost 6
           percent greater than this time last year. However, taxpayers' use
           of the Free File program, accessible through IRS's Web site and
           which allows for free on line tax preparation and electronic
           filing, is 5.2 percent below last year at this time. IRS's latest
           release of the Customer Account Data Engine (CADE), a modern tax
           return processing system that issues faster refunds, was
           delayed--it became operational 2 months behind schedule. IRS
           expects to post approximately 17 - 19 million taxpayer returns to
           CADE in 2007. Although this is less than the 33 million planned,
           it is almost two and a half times the approximately 7.4 million
           taxpayer accounts posted last year on CADE. With respect to
           taxpayer service, call volume continued to decline, taxpayers'
           ability to reach an IRS assistor was somewhat less than last year,
           but the accuracy of answers to taxpayers' questions was about the
           same as last year. Use of IRS's Web site continues to increase,
           important because it is available around the clock and is lower
           cost than most other types of assistance. About 69 percent of
           individual income tax returns filed to date included TETR
           requests. The impact of TETR on taxpayer services has been much
           less than IRS anticipated. For example, IRS has received a
           fraction of the TETR-related telephone calls it expected to date.

           o Because they help the majority of taxpayers prepare their
           returns, paid preparers are a critical quality control checkpoint
           for the tax system. Last year, over 62 percent of all individual
           income tax returns were prepared by paid preparers. However, we
           reported to this Committee last year about errors made by paid
           preparers.^5 In visits to 19 outlets of several commercial chain
           preparers, we found that paid preparers made mistakes in every one
           of our visits, with tax consequences that were sometimes
           significant. Some of the most serious problems involved preparers
           not reporting business income and failing to itemize deductions at
           all or failing to claim all available deductions. The limited data
           did not permit observations about the quality of the work of paid
           tax preparers in general. Undoubtedly, many paid preparers do
           their best to provide their clients with tax returns that are
           compliant with the tax law. IRS has initiated some enforcement
           actions in response to our findings with audits of some preparers'
           returns scheduled to begin in April 2007. Recent Justice
           Department suits to stop fraudulent return preparation at more
           than 125 outlets of one preparation chain for allegedly taking
           part in preparation scams highlight the obligations of paid
           preparers. Their due diligence has the potential to prevent
           noncompliance and reduce IRS's cost and intrusiveness.

           o IRS continues to make progress in implementing BSM projects and
           meeting cost and schedule commitments, but two key projects--CADE
           (discussed above) and Modernized e-File (a new electronic filing
           system)--experienced significant cost overruns during 2006. Future
           BSM project releases face serious risks, which IRS is working to
           mitigate. For example, delays in deploying the latest release of
           CADE have resulted in contention for key resources and will likely
           impact the design and development of the next two important
           releases, which are scheduled to be deployed later this year. IRS
           has made significant progress in implementing our prior
           recommendations and improving its modernization management
           controls and capabilities. However, critical controls and
           capabilities related to requirements development and management
           and post-implementation reviews of deployed BSM projects have not
           yet been fully implemented. In addition, more work remains to be
           done by the agency to fully develop a long-term vision and
           strategy for completing the BSM program, including establishing
           time frames for consolidating and retiring legacy systems.

           o Continued compliance research is essential to IRS's ability to
           effectively focus its service and compliance efforts, and we have
           long been a supporter of such research. Well-designed compliance
           research gives IRS and Congress an important measure of taxpayer
           compliance and it allows IRS to better target enforcement
           resources towards noncompliant taxpayers. IRS's fiscal year 2008
           budget request includes a proposal for a rolling sample of
           individual returns (small annual samples that would replace larger
           but intermittent efforts) and a dedicated cadre of examiners to
           review the returns. We consider this to be a good approach to
           refreshing research compliance data because doing compliance
           studies once every few years does not provide information in the
           intervening years. A rolling sample should also reduce costs by
           eliminating the need to plan new studies every few years.

^4 See, for example, GAO, Taxpayer Service: State Experiences Indicate IRS
Would Face Challenges Developing an Internet Filing System with Net
Benefits, [24]GAO-07-570 (Washington, D.C.: Apr. 5, 2007), GAO, Tax
Administration: Telephone Excise Tax Refund Requests Are Fewer Than
Projected and Have Had Minimal Impact on IRS Services, [25]GAO-07-695
(Washington, D.C.: Apr. 11, 2007), GAO, Business Systems Modernization:
Internal Revenue Service's Fiscal Year 2007 Expenditure Plan,
[26]GAO-07-247 (Washington, D.C.: Feb. 15, 2007) and GAO, Tax Compliance:
Multiple Approaches Are Needed to Reduce the Tax Gap, [27]GAO-07-488T
(Washington, D.C.: Feb. 16, 2007).

^5 GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers
Made Serious Errors, [28]GAO-06-563T (Washington, D.C.: Apr. 4, 2006).

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 March 30, 2007, IRS processed 76.8 million returns,
about the same number as last year, and issued 68.3 million refunds for
$163.4 billion compared to 66.7 million refunds for $154.4 billion at the
same time last year. Over 69.3 percent of all refunds were directly
deposited into taxpayers' accounts, up 6.2 percent over the same time last
year. Direct deposits are faster and more convenient for taxpayers than
mailing paper checks.

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 a large tax preparation
company, 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 storing 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 had originally planned to post 33
million taxpayer returns to CADE and the remaining 100 million individual
returns on the legacy system. However, as a result of the delay, officials
expect to post approximately 17 -19 million taxpayer returns to CADE.
Although this is significantly less than planned, it is almost two and a
half times the approximate 7.4 million taxpayer accounts posted last year
on CADE. Taxpayers eligible for a refund this year whose returns are
posted to 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
remaining 14 - 16 million returns that were to have been processed on CADE
were instead processed by the legacy system and thus did not receive the
benefit of faster refunds. 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 growth rate for electronic filing is up from the same period last
year. As of March 30, over 56.9 million (74.1 percent) of all individual
income tax returns were filed electronically. This is up 5.8 percent over
the same time last year, and an increase over the previous years' growth
of 3.3 percent.

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.^6 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 paper tax returns than
in 1999, shown in figure 1. 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.

^6 [29]GAO-07-27 .

Figure 1: Number of Individual Returns and IRS Staff Years for Individual
Paper and Electronic Processing, Fiscal Years 1999 - 2008

Notes: Staff years and full-time equivalents are units of measurement that
are often used interchangeably. According to IRS, a full-time equivalent
is the equivalent of one person working full-time for one year with no
overtime. A staff year includes overtime. Therefore, the cost of one staff
year is equal to the cost of one full-time equivalent plus overtime.
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.^7 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 March 17, 2007, IRS processed about 2.6 million free file returns,
which is a decrease of 5.2 percent from the same period last year. 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.^8

7 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.

  States' Internet Return Preparation and Electronic Filing Benefits and Costs
  Were Modest

We recently reported to this Committee on states' experience with return
preparation and electronic filing on their Web sites.^9 These systems,
called I-file, provide taxpayers with another option for preparing and
electronically filing their tax returns. To the extent that the I-file
systems convert taxpayers from paper to electronic filing, the costs of
processing returns are reduced.

For the eight states we profiled, I-file benefits and costs were
relatively modest. While state I-file systems generated benefits, such as
increased electronic filing, the overall benefits were limited by low
usage, which ranged from about 1 percent to just over 5 percent of
eligible taxpayers. Restrictions on taxpayer eligibility and system
features helped keep costs modest. States varied in whether they used
contractors to develop and operate the I-file system. For the states we
profiled, it is unclear whether benefits were greater than costs, in part,
because of the low number of taxpayers who converted from paper to
electronic filing.

IRS's potential to realize net cost savings from an I-file system depends
on the costs of developing the system and the number of taxpayers
converted from paper. IRS's costs to provide a new I-file service could be
higher than states' for several reasons: (1) the federal tax system is
more complex, (2) unlike some states that already had transactional Web
sites, IRS would need to develop the capability to receive tax returns on
its Web site, and (3) developing an I-file system could further stretch
IRS's capability to manage systems development, an area we have designated
high risk since 1995. The key to IRS achieving a net cost savings depends
on the number of individuals converted from paper to electronic filing and
the savings per return estimated to be $2.36 by IRS.^10 It is uncertain
how many of the 58 million taxpayers who filed on paper would convert. The
over 13 million taxpayers who self-prepare their returns on a computer but
print them out and mail them to IRS are an attractive target for I-file
because they already have access to a computer and may be more willing to
try I-file. However, IRS's Free File program, designed to attract similar
taxpayers, had low use in 2006, with only 4 million users (about 3 percent
of total taxpayers and 4 percent of eligible taxpayers).

^8 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).

^9 [30]GAO-07-570 .

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

TETR and split refund volume have been less than IRS projected. Almost 69
percent of individuals who filed individual income tax returns by the end
of March have requested 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. Approximately
410,000 individuals from this group have asked for a TETR refund (2.8
percent of the 14.5 million IRS expected by this time).^11

As of March 24, fewer than 61,000 individual taxpayers chose to split
their refunds into different accounts out of the 44.8 million taxpayers
who had their refunds directly deposited. This volume compares to the 3.8
million 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.

Call Volume Continues to Decline, but Performance Is Mixed

The number of calls to IRS's toll-free telephone lines has been less than
last year and is significantly less than in 2002 for both automated and
live assistance (see table 1). Similar to last year, IRS assistors
answered about 40 percent of the total calls, while the rest of the calls
were answered by an automated menu of recordings.

^10 We have previously reported that we cannot independently verify this
estimate and its basis is unclear because IRS's cost accounting system is
not yet able to support preparation of such cost estimates. See GAO, Tax
Administration: IRS Improved Performance in the 2004 Filing Season, but
Better Data on the Quality of Some Services are Needed, [31]GAO-05-67
(Washington, D.C.: Nov.15, 2006).

^11 We are in the process of obtaining additional information to evaluate
IRS projections on TETR and split refund volumes.

Table 1: IRS Telephone Volume in the Filing Seasons, 2002 through 2007

Volume in thousands                2002   2003   2004   2005   2006   2007 
Telephone assistance ^a                                                    
Total calls                      34,489 27,905 29,085 23,340 21,616 20,732 
Answered by assistors             9,208  9,434 10,143  9,421  8,653  8,434 
Answered by automated menu of    25,281 18,471 18,942 13,919 12,963 12,298 
recordings                                                                 

Source: IRS.

a Telephone assistance data are based on actual counts from January 1 to
March 16, 2002; March 15, 2003; March 13, 2004; March 12, 2005; March 11,
2006; and March 10, 2007.

Taxpayers' ability to access IRS's telephone assistors is somewhat less
than last year, but IRS is meeting its goals. As shown in table 2, 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 less than the same time period last
year. This level of performance is slightly greater than IRS's fiscal year
goal of 82 percent which is the same as last year's goal. Average speed of
answer, which is the length of time taxpayers wait to get their calls
answered, is just over 4 minutes, almost 40 percent longer than last year,
but is better than IRS's annual goal of 4.3 minutes.

Taxpayer disconnects, which is the rate at which taxpayers waiting to
speak with an assistor abandoned their calls to IRS, increased to 12.3
percent to about 1.4 million calls compared to the same time period last
year. While IRS disconnects are a smaller percentage of all calls it
receives, those disconnects were down from approximately 491,000 at this
time last year to 148,000 (a 70 percent decline).

Using a statistical sampling process, 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. IRS officials noted that
there was unprecedented hiring for fiscal year 2007, and while every
employee working tax law applications completes a requisite certification
process, new employees will be less productive than seasoned employees.
IRS has implemented several initiatives, such as targeted monitoring of
staff and mini-training sessions, to assist the new hires.

Table 2: IRS Telephone Performance in the Filing Season, 2002 through 2007

                                           2002  2003  2004  2005  2006  2007 
Telephone performance-accessa                                              
Asssistor level of service^b             69%   82%   84%   83%   84%   83% 
Average speed of answer (in minutes)^c   3.8   3.1   3.3   3.9   3.0   4.2 
Telephone performance-accuracy^d                                           
Accounts customer accuracy rate        88.3% 87.9% 89.1% 91.7% 92.7% 92.9% 
estimates                                +/-   +/-   +/-   +/-   +/-   +/- 
                                           0.9%  0.7%  0.8%  0.7%  0.7%  0.9% 
Tax law customer accuracy rate         83.5% 81.2% 75.8% 87.5% 90.2% 88.7% 
estimates                                +/-   +/-   +/-   +/-   +/-   +/- 
                                           0.7%  1.0%  1.3%  1.0%  1.0%  1.5% 

Source: IRS.

a Telephone performance access data are based on actual counts from
January 1 to March 16, 2002; March 15, 2003; March 13, 2004; March 12,
2005; March 11, 2006; and March 10, 2007.

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

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

d Based on a representative sample estimate at the 90 percent confidence
interval for January and February 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 what IRS projected. Between January 1 and March 10,
2007, IRS expected 7.5 million TETR-related calls, but received about
370,000. This represented 1.8 percent of total calls received by IRS.

IRS hired 650 full-time equivalents in fiscal year 2007, with the
expectation that those hires would be used to cover anticipated attrition
in 2008. Their first assignment was answering TETR telephone calls. They
were also trained to handle other accounts calls and paper inventory
should the demand for TETR assistance not materialize.^12

12 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 more paper correspondence than anticipated.
From October 1, 2006 through March 24 2007, receipts of paper inventory
were up about 6 percent and IRS had closed 10 percent more paper inventory
than at the same time period last year.

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 7,000 calls compared to the 70 million total calls it
receives each year. IRS did not have projections for tax provision
extenders.

Use of Some 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 and tax law
questions. From January 1 through February 28, IRS's Web site was visited
more often and the number of searches increased. The number of downloaded
forms and publications has decreased 14 percent over the same period
compared to last year. According to IRS officials, it is too early in the
filing season to determine why downloads have decreased. 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.

Table 3 IRS Web Site Use, 2006 and 2007 (data are in thousands)

Uses                              2006   2007 Percentage change 
Visits^a                        66,571 72,979               9.6 
Downloads^a                     56,405 48,449             -14.1 
Searches^a                      35,917 41,435              15.4 
Where's My Refund^b             19,776 24,724              25.0 
Number of TETR-related visits^c    N/A  3,283               N/A 

Source: GAO analysis of IRS data.

Note: N/A means not applicable.

a Web site visits and searches and downloads from January and February
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.

b For January 1 through March 20, 2006, and 2007.

c Visits to a Web page specific to TETR, which was not operational in
2006. For October 1, 2006, through March 10, 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 is part
of IRS's 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,^13 IRS's
           Web site is scoring above other government agencies, nonprofits,
           and private sector firms for customer satisfaction (74 for IRS
           versus 72 for all government agencies surveyed and 71 for all Web
           sites surveyed).

           o An independent weekly study by Keynote, a company that evaluates
           Web sites, reported that 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.

^13 The American Customer Satisfaction Index tracks trends in customer
satisfaction and is considered to be an industry leader.

Limited Data on the Quality of Face-to-Face Assistance Show Improvement, but
Concerns Remain

As of March 17, 2007, approximately 2 million taxpayers used IRS's 401
walk-in sites, which is comparable to the same period last year. Figure 2
shows the trend in walk-in site use for the entire filing season including
a slight projected decline in 2007. At walk-in sites, staff provide
taxpayers with information about their tax accounts, answer a limited
scope of tax law questions about, for example, to income and filing
status, and provide limited tax return preparation assistance.^14 As of
March 10, 6,700 taxpayers have requested TETR on Form 1040EZ-T at walk-in
sites, which is 5.3 percent of the 126,000 individuals IRS expected.

^14 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 2: 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 28,
2006, and January 1, through April 30, 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 4 percent fewer full-time equivalents
compared to last year for walk-in assistance (down from 187 to 179
full-time equivalents).

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. The number of taxpayers getting
return preparation assistance at over 11,000 volunteer sites has increased
to approximately 1.3 million, up 8 percent from last year and continuing a
trend since 2001. Although no projections have been made for TETR claims,
over 33,000 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.^15 While IRS
provides return assistance for 125,000 taxpayers, it lacks information on
the accuracy of that assistance. For volunteer sites, as of March 2, for a
small non-statistical sample, IRS reported a 69 percent accuracy rate for
return preparation, compared to its goal of 55 percent. Independent from
IRS, but using similar methods, TIGTA showed a 60 percent accuracy rate.

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.^16 Since
the provisions extending the tax laws already existed, IRS anticipates
that any compliance concerns for 2006 returns will be the same as for
previous years'.

^15 As of March 10, IRS reported tax law and accounts assistance accuracy
rates of 74 and 85 percent respectively. 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 74
percent would achieve the goal if a confidence interval were considered.

^16 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.

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 and selects some for audit and revises the criteria for audit
selection as necessary.

As of March 24, about 211,000 individuals had requested the actual amount
of telephone excise tax paid for a total of $98.8 million. IRS selected
about 5 percent of these requests for audit, involving about $29
million.^17 IRS has closed four of the individual audits with the taxpayer
agreeing to accept the standard amount, and has not completed the
remaining individual audits or any of the business audits.^18 About
189,000 businesses had requested TETR for a total of about $74.7 million.
IRS selected about 560 for audit, involving about $5.6 million. IRS
reassigned about 77 full-time equivalent staff from discretionary audits
and earned income tax credit audits to conduct TETR audits. Additionally,
Criminal Investigation has spent 13 full-time equivalent staff on TETR
activities in 2007.

Paid Preparers Play a Major Role in Tax Administration but They Make Errors

Many taxpayers choose to pay others to prepare their tax returns rather
than prepare their own returns. Sixty-two percent of all the individual
tax returns filed for the 2006 filing season used a paid preparer.

In most states, anyone can be a paid preparer regardless of education,
training, or licensure. However, there are different types of preparers.
Paid preparers who hold professional certificates include CPAs and
attorneys. Other preparers vary in their backgrounds. Some have extensive
training and experience and others do not.

^17 According to IRS officials, as of March 17, 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.

^18 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.

In 2003 we reported to this Committee that while many taxpayers who used
paid preparers believed they benefited from doing so, some were poorly
served.^19 Last year we reported to this Committee on errors made by
commercial chain preparers, including the results of undercover visits to
19 locations.^20

In our visits to 19 outlets of several commercial chain preparers, we
found that paid preparers made mistakes in every one of our visits, with
tax consequences that were sometimes significant. The errors resulted in
unwarranted extra refunds of up to almost $2,000 in five instances, while
in two cases they cost the taxpayer over $1,500. Some of the most serious
problems involved preparers

           o not reporting business income in 10 of 19 cases;

           o not asking about where a child lived or ignoring our answer to
           the question and, therefore, claiming an ineligible child for the
           earned income tax credit in 5 out of the 10 applicable cases;

           o failing to take the most advantageous postsecondary education
           tax benefit in 3 out of the 9 applicable cases; and

           o failing to itemize deductions at all or failing to claim all
           available deductions in 7 out of the 9 applicable cases.

At the time, IRS officials responded that, had our undercover
investigators been real taxpayers filing tax returns, many of the
preparers would have been subject to penalties for such things as
negligence and willful or reckless disregard of tax rules and some may
have risen to the level of criminal prosecution for willful preparation of
a false or fraudulent return. The taxpayers in these cases would also have
been potentially exposed to IRS enforcement action.

The limited data did not permit observations about the quality of the work
of paid tax preparers in general. Undoubtedly, many paid preparers do
their best to provide their clients with tax returns that are both fully
compliant with the tax law and cause them to neither overpay nor underpay
their federal income taxes.

^19 GAO, Tax Administration: Most Taxpayers Believe They Benefit from Paid
Tax Preparers, but Oversight for IRS is a Challenge, [32]GAO-04-70 ,
(Washington, D.C.: Oct. 31, 2003).

^20 [33]GAO-06-563T .

IRS and the paid preparer community have taken some actions as a result of
our work. After we provided the results of our 19 visits to IRS, IRS
determined that 4 of these cases warranted a Program Action Case. In a
Program Action Case, IRS selects 30 tax returns from a preparer and audits
them to look for a pattern of compliance problems. IRS officials told us
that these audits would begin in April 2007. Other cases were referred to
the office responsible for monitoring earned income tax credit compliance,
and we have been told that 10 preparers that we visited will receive
visits to check for compliance with the due diligence requirements of that
program. IRS also referred the cases to the office that monitors
electronic filing compliance.

We also presented our findings at all six of its nationwide tax forums
last year, large educational conferences for the paid preparer community.
In addition, we have been told that some tax preparation chains and
preparer organizations have incorporated the results of our work into
their educational materials. Finally, we recommended that IRS conduct
research to determine the extent to which paid preparers live up to their
responsibilities to file accurate and complete tax returns based on
information they obtain from their customers. IRS officials have described
plans to develop data to use to research paid preparer compliance issues,
including whether tax preparers who are noncompliant themselves are more
likely to prepare client returns that are noncompliant. To date, this
research has not been completed. While this may be useful research, we do
not believe such research would determine the extent to which paid
preparers live up to their responsibilities.

Recent suits filed by the Justice Department highlight the obligations of
paid preparers. The Justice Department filed suits to stop fraudulent
return preparation at more than 125 outlets in four states of one
preparation chain for allegedly taking part in preparation scams that led
to fraudulent returns.

Because they help the majority of taxpayers prepare their returns, paid
preparers are a critical quality control checkpoint for the tax system.
Due diligence by paid preparers has potential to prevent non-compliance
and reduce IRS's cost and intrusiveness.

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.^21 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.

^21Accounts 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.

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.^22 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.

Continued Research Is Essential to Estimating the Impact of IRS's Service and
Enforcement on Compliance and the Tax Gap

Continued compliance research is essential to IRS's ability to effectively
focus its service and compliance efforts, and we have long been a
supporter of such research. Well designed compliance research gives 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 develops its tax gap estimates by measuring the rate of taxpayer
compliance--the degree to which taxpayers complied with their tax
obligations fully and on time. That rate is then used, along with other
data and assumptions, to estimate the dollar amount of taxes not timely
and accurately paid. For instance, IRS most recently estimated a gross tax
gap of $345 billion for tax year 2001 and that underreporting of income
represented over 80 percent of the gap.^23 IRS developed these estimates
using compliance data collected through its 2001 NRP study, which took
several years to plan and execute.

In that study, IRS reviewed the compliance of a random sample of about
46,000 individual taxpayers and used those results to estimate compliance
for the population of all individual taxpayers and identify sources of
noncompliance. IRS also used the 2001 NRP results to update its computer
models for selecting likely noncompliant tax returns and used that model
to select cases beginning with returns filed in 2006. IRS's fiscal year
2008 budget request states that this improved targeting of audits has
increased dollar-per-case yield and reduced "no change" audits of
compliant taxpayers. IRS now has a second NRP study underway, this one
looking at 5,000 S corporation tax returns filed in 2003 and 2004.^24

22 [34]GAO-07-247 .

^23 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 other 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.

IRS's fiscal year 2008 budget request includes a proposal for a rolling
NRP sample of individual taxpayers and a dedicated cadre of examiners to
conduct these research audits. Using a rolling sample, IRS plans to
replicate the 2001 NRP study by conducting audits of a smaller sample
size. 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. We support this approach. In
previous GAO products, we have observed that doing compliance studies once
every few years does not give IRS or others information about what is
happening in the intervening years, and that 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.^25 Compliance
research in this way will also give Congress, IRS, and other stakeholders
more frequent and more current information about IRS's progress towards
its long term compliance goals.

Mr. Chairman, this concludes my prepared statement. We 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, at 202-512-9910 or [email protected]
or David A. Powner, Director, Information Technology Management Issues at
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; Timothy D.
Hopkins; Robyn Howard; Matthew Kalmuk; David L. Lewis; Frederick Lyles;
Jennifer McDonald; Signora May; Veronica Mayhand; Paul B. Middleton;
Sabine R. Paul; Cheryl Peterson; Neil Pinney; Shellee Soliday; and Tina L.
Younger.

^24 IRS has no estimates for other areas of the tax gap, and it is
inherently difficult to measure some types of noncompliance. The tax gap
estimate for areas such as corporate income tax and employer-withheld
employment tax underreporting rely on decades-old data.

^25 GAO, Internal Revenue Service: Assessment of the Interim Results of
the 2006 Filing Season and Fiscal Year 2007 Budget Request,
[37]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, [38]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,
[39]GAO-05-527T Washington, D.C. Apr. 14, 2005).

(450583)

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Highlights of [47]GAO-07-720T , testimony before the Committee on Finance,
U.S. Senate

April 12, 2007

2007 TAX FILING SEASON

Interim Results and Updates of Previous Assessments of Paid Preparers and
IRS's Modernization and Compliance Research Efforts

The Internal Revenue Service's (IRS) tax filing season performance is a
key indicator of how well IRS serves taxpayers. This year's filing season
was expected to be risky because of tax system changes, including the
telephone excise tax refund (TETR) which can be requested by all
individuals and entities that paid the excise tax.

GAO was asked to describe IRS's service to taxpayers so far this filing
season (including the impact of this year's tax systems changes). GAO was
also asked to provide updates of previous assessments of the performance
of paid tax preparers, IRS's efforts to modernize its information systems,
and what IRS is doing to better measure taxpayer compliance. GAO compared
IRS's filing season performance to prior years' and goals and based
analyses of paid preparers, information systems, and compliance research
efforts on recent reports.

[48]What GAO Recommends

GAO is not making any new recommendations, but notes relevant past
recommendations and their implementation status.

IRS's interim filing season performance is improved in some areas. The
number of individual income tax returns processed to date is comparable to
last year, and the number filed electronically is almost 6 percent
greater. Taxpayers' ability to reach an IRS telephone assistor was
somewhat less than last year, but the accuracy of answers to taxpayers'
questions was about the same. Use of IRS's Web site increased, important
because it is available 24 hours a day and is less costly than some other
types of assistance. However, there have been challenges. Taxpayers' use
of the Free File program, which provides free tax preparation and
electronic filing through IRS's Web site--is 5.2 percent below last year
at this time. Also, the Customer Account Data Engine (CADE), a modern tax
return processing system, became operational 2 months behind schedule. IRS
still expects to post 17 -19 million taxpayer accounts to CADE, which is
about two and a half times more than last year. Tax systems changes have
not had a significant effect on filing season performance. For example,
IRS has received a fraction of the TETR-related telephone calls it
expected to date.

Because paid preparers prepared over 62 percent of all individual income
tax returns last year, they are a critical quality control for tax
administration by helping to prevent noncompliance. Last year, GAO
reported to this Committee about errors made by paid preparers. Some of
the most serious errors involved not reporting business income and failing
to itemize deductions. GAO's limited work last year did not permit
observations about the quality of the work of paid tax preparers in
general and undoubtedly, many preparers do their best to prepare tax
returns that are compliant with tax laws. In response to GAO's report, IRS
has scheduled compliance reviews of some preparers. In addition, recent
Justice Department suits to stop fraudulent return preparation at more
than 125 outlets of one preparation chain for allegedly taking part in tax
preparation scams highlight the importance and obligations of paid
preparers.

Despite progress made in implementing Business Systems Modernization
projects, including CADE, and improving modernization 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. Also, IRS has more to do
to fully address GAO's prior recommendations such as developing a
long-term strategy that would include timeframes for retiring legacy
computer systems.

GAO has long supported IRS's research to better understand taxpayers'
compliance. IRS's fiscal year 2008 budget request includes a proposal for
annual research instead of larger but intermittent efforts. GAO considers
this to be a good approach because it will allow compliance data to be
continually refreshed and should reduce costs by eliminating the need to
plan new studies every few years.

References

Visible links
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-51
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-615T
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-07-27
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-570
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-695
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-247
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-488T
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-563T
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-27
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-570
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-05-67
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-04-70
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-06-563T
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-247
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-06-499T
  38. http://www.gao.gov/cgi-bin/getrpt?GAO-05-753
  39. http://www.gao.gov/cgi-bin/getrpt?GAO-05-527T
  47. http://www.gao.gov/cgi-bin/getrpt?GAO-07-720T
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