Tax Administration: 2007 Filing Season Continues Trend of	 
Improvement, but Opportunities to Reduce Costs and Increase Tax  
Compliance Should be Evaluated (15-NOV-07, GAO-08-38).		 
                                                                 
In 2007, the Internal Revenue Service (IRS) will spend over $3	 
billion to process returns and provide taxpayer service.	 
Effective service can reduce taxpayers' burden of complying with 
tax laws and, many tax experts believe, may improve compliance.  
GAO was asked to assess IRS's performance relative to 2007 goals 
and prior years' performance including identifying actions that  
might generate efficiencies and increase compliance. GAO analyzed
IRS performance data, reviewed IRS operations at various	 
locations, and interviewed IRS and paid preparer representatives.
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-38						        
    ACCNO:   A78208						        
  TITLE:     Tax Administration: 2007 Filing Season Continues Trend of
Improvement, but Opportunities to Reduce Costs and Increase Tax  
Compliance Should be Evaluated					 
     DATE:   11/15/2007 
  SUBJECT:   Cost analysis					 
	     Customer service					 
	     E-government					 
	     Federal taxes					 
	     Financial management				 
	     Income taxes					 
	     Information technology				 
	     Program evaluation 				 
	     Program management 				 
	     Tax administration 				 
	     Tax administration systems 			 
	     Tax law						 
	     Tax returns					 
	     Taxes						 
	     Taxpayers						 
	     GAO High Risk Series				 
	     IRS Taxpayer Assistance Blueprint			 

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GAO-08-38

   

     * [1]Results in Brief
     * [2]Scope and Methodology
     * [3]Background
     * [4]Electronic Filing Continued to Generate Savings, Processing

          * [5]Electronic Filing Continues to Increase and Generate Savings
          * [6]IRS's Processing Performance Continues to Improve
          * [7]Delays in CADE Prevented Millions of Taxpayers from Benefiti
          * [8]IRS May Be Missing Opportunities to Further Reduce Costs and

     * [9]IRS Has Limited Information on Paid Preparers Who Prepare th
     * [10]Access to IRS's Telephone Assistors Was Comparable to Last Y

          * [11]Telephone Access Was Comparable to Last Year and Accuracy of
          * [12]Call Demand Was Comparable to Last Year, and Telephone Servi
          * [13]IRS Is Reviewing Options for Reducing Excess Capacity at Cal

     * [14]Web Site Performance Remains High, and Initiatives Are On-go
     * [15]Taxpayer Assistance Continued to Grow at Volunteer Sites and
     * [16]The Value of TAB Depends on Funding and Ability to Link Taxp
     * [17]Conclusions
     * [18]Recommendations for Executive Action
     * [19]Agency Comments and Our Evaluation
     * [20]GAO's Mission
     * [21]Obtaining Copies of GAO Reports and Testimony

          * [22]Order by Mail or Phone

     * [23]To Report Fraud, Waste, and Abuse in Federal Programs
     * [24]Congressional Relations
     * [25]Public Affairs

Report to Congressional Requesters

United States Government Accountability Office

GAO

November 2007

TAX ADMINISTRATION

2007 Filing Season Continues Trend of Improvement, but Opportunities to
Reduce Costs and Increase Tax Compliance Should be Evaluated
GAO-08-38

Contents

Letter 1

Results in Brief 3
Scope and Methodology 5
Background 7
Electronic Filing Continued to Generate Savings, Processing Performance
Improved, but CADE Was Delayed, and Opportunities Exist to Reduce Costs
and Improve Compliance 10
IRS Has Limited Information on Paid Preparers Who Prepare the Majority of
Tax Returns, but Has Efforts Underway to Acquire More 17
Access to IRS's Telephone Assistors Was Comparable to Last Year, Accuracy
Remains High, and IRS Is Reviewing Options for Reducing Excess Capacity at
Call Sites 19
Web Site Performance Remains High, and Initiatives Are On-going to Enhance
Web Capabilities and User Experience 25
Taxpayer Assistance Continued to Grow at Volunteer Sites and Decline at
IRS's Walk-in Sites; While Quality has Improved in Some Areas, More
Reliable Data Are Needed 27
The Value of TAB Depends on Funding and Ability to Link Taxpayer Service
to Compliance 32
Conclusions 34
Recommendations for Executive Action 35
Agency Comments and Our Evaluation 35
Appendix I IRS's Processing Performance Relative to 2001-2006 Performance
and 2007 Goals 37
Appendix II Comments from the Internal Revenue Service 40

Tables

Table 1: IRS Telephone Assistors Performance, 2001--2007 Filing Seasons 21
Table 2: IRS Telephone Assistor Accuracy Performance, 2001--2007 Filing
Seasons 21
Table 3: IRS Web Site Use, 2006 and 2007 (data are in thousands) 26
Table 4: IRS's Fiscal Year 2005 Estimated Unit Costs 33
Table 5: IRS's Processing Performance, Fiscal Years 2001--2007 37

Figures

Figure 1: IRS's 2007 Filing Season Activities 7
Figure 2: Percentage of Returns with a Paid Preparer Signature 17
Figure 3: How IRS Handled Calls During 2007 22
Figure 4: Telephone Assistance and Paper Inventory Resources by Workload
24
Figure 5: Trends in Face-to-face Return Preparation, 2001 through 2007 28
Figure 6: Contact Recording at Walk-in Sites 30

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Abbreviations

AMS Account Management System
BSM Business Systems Modernization
CADE Customer Account Data Engine
IRS Internal Revenue Service
RRA 98 IRS Restructuring and Reform Act of 1998
SSN Social Security numbers
TAB Taxpayer Assistance Blueprint
TETR Telephone Excise Tax Refund
TIGTA Treasury Inspector General for Tax Administration

United States Government Accountability Office
Washington, DC 20548

November 15, 2007

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable Jim Ramstad: 
Ranking Member: 
Subcommittee on Oversight: 
Committee on Ways and Means: 
House of Representatives: 

The quality of the Internal Revenue Service's (IRS) filing season service
is important for several reasons. Effective service can reduce the burden
for taxpayers, in terms of time and money, of complying with tax laws.
Further, many tax experts believe that quality service has a positive
effect on compliance, although it is difficult to demonstrate empirically.

Taxpayer service also matters because IRS allocated over 30 percent of its
$11 billion budget to provide such service for fiscal year 2007. IRS
spends most of this during the filing season when most taxpayers interact
with the agency.1 Filing season service includes individual income tax
return processing as well as telephone, Web site, and face-to-face
assistance. In past reports and testimonies we said that IRS has made
significant progress improving taxpayer service since the passage of the
IRS Restructuring and Reform Act of 1998 (RRA 98).2 In an effort to
continue improving service, IRS recently released, as mandated by the
Congress, its Taxpayer Assistance Blueprint (TAB). TAB is intended to
outline a 5-year comprehensive strategy for improving taxpayer service
while minimizing cost and determining the link between service and
compliance.3

1Most taxpayers file their tax returns between January 1 and April 15,
which is the deadline for filing individual income tax returns. However,
millions of taxpayers receive extensions from IRS, which allows them to
delay filing until as late as October 15.

2See, for example, GAO, Tax Administration: Most Filing Season Services
Continue to Improve, but Opportunities Exist for Additional Savings,
[26]GAO-07-27 (Washington, D.C.: Nov. 15, 2006). Pub. L. No. 105-206
(1998).

In addition to IRS, paid tax return preparers are another important
provider of service to taxpayers during the filing season, preparing over
half of individual income tax returns. In previous reports, we have
expressed concern about the quality of paid preparer service and lack of
information IRS has about the extent of problems.4

In light of the tax filing season's cost and importance to taxpayers, you
asked us to assess IRS's 2007 filing season performance. Our objectives,
for each of IRS's main filing season services, were to assess IRS's
performance relative to 2007 goals and prior years' performance, including
identifying actions that might generate efficiencies and increase
compliance, and the extent to which IRS monitors paid preparer
performance. Additionally, you asked us to describe the challenges
associated with TAB. We testified on IRS's interim 2007 performance before
the Subcommittee on Financial Services and General Government, Committee
on Appropriations, U.S. Senate, on May 9, 2007, and before the Committee
on Finance, U.S. Senate, on April 12, 2007; we also issued a report to the
Subcommittee on Oversight, Committee on Ways and Means, House of
Representatives on April 3, 2007.5

We based our assessment on the results and analyses of IRS data and
reports, workload and performance information, observations of IRS's
operations, interviews with IRS officials, information from
representatives of some of the larger tax preparation companies and
professional associations that represent preparers providing tax
assistance, and reports by the Treasury Inspector General for Tax
Administration (TIGTA). We have used IRS data in past filing season
reports and continue to find them sufficiently reliable for the purposes
of this report. Further details on our scope and methodology are provided
later in this report. We performed our work from January through October
2007 in accordance with generally accepted government auditing standards.

3Joint Explanatory Statement of the Committee of Conference: Internal
Revenue Service, Processing Assistance, and Management (Including
Rescission of Funds), H. R. Rep. No. 109-307 (2005).

4See, for example, GAO, Paid Tax Return Preparers: In a Limited Study,
Chain Preparers Made Serious Errors, [27]GAO-06-563T (Washington, D.C.:
Apr. 4, 2006).

5GAO, Internal Revenue Service: Assessment of the 2008 Budget Request and
an Update of 2007 Performance, [28]GAO-07-719T (Washington, D.C: May 9,
2007), 2007 Tax Filing Season: Interim Results and Updates of Previous
Assessments of Paid Preparers and IRS's Modernization and Compliance
Research, [29]GAO-07-720T (Washington, D.C: Apr. 12, 2007), and Internal
Revenue Service: Interim Results of the 2007 Tax Filing Season and the
Fiscal Year 2008 Budget Request, [30]GAO-07-673 (Washington, D.C.: Apr. 3,
2007).

Results in Brief

IRS improved most of its filing season services--paper and electronic
processing and telephone, Web site, and face-to-face assistance--but
opportunities to realize additional savings and increase tax compliance
exist, but have not been evaluated.

Processing: IRS processed approximately 135 million individual income tax
returns during 2007, by most measures exceeding last year's performance
and meeting this year's goals. However, further improvements in processing
are possible. First, IRS delivered the latest release of its new tax
return processing system, the Customer Account Data Engine (CADE), late,
which prevented millions of taxpayers from getting faster refunds in 2007.
The new release was fully operational in May, which should benefit
taxpayers in the 2008 filing season. Second, despite almost 60 percent of
returns being filed electronically, taxpayers filed over 50 million
returns on paper. Because of the cost, IRS does not transcribe all lines
from tax returns, precluding the use of these data in IRS's computerized
compliance checks. Further, to avoid disadvantaging taxpayers who file
electronically, IRS does not post those lines from electronic returns to
its enforcement data bases. At least two options exist for transcribing
and posting all lines from tax returns. One, which we previously
suggested, is to mandate electronic filing for paid preparers. Another
option would be to require paper returns prepared using commercial
software to be bar coded, allowing for scanning and some of the
efficiencies of electronic filing. Either option might reduce the number
of residual paper returns enough to allow for full transcription. Although
IRS has done some research on bar coding and full transcription, it does
not know the actions needed to require commercial software vendors to
include bar codes on printed returns, the benefits in terms of processing
cost savings and increased enforcement revenue of having all tax return
data available electronically, or how much electronic filing would have to
increase (either through mandates or bar coding) for the benefits of fully
transcribing all residual paper returns to exceed the costs.

Paid preparers: In 2006, paid preparers accounted for 61 percent of
returns filed. IRS gathers basic information on preparers, such as names
and Social Security numbers (SSN), but does not compile other information
about each preparer, such as the number of returns filed and type of
preparer.6 IRS has research and other initiatives under way to gather more
information on paid preparers, which should give the Congress and IRS a
better basis for making decisions about the future oversight of paid
preparers.

Telephone assistance: Access to IRS telephone assistors was comparable to
last year and the accuracy of responses to telephone tax law and account
questions is at least 90 percent. IRS has several improvement initiatives
under way and is reviewing options for reducing excess capacity at call
sites, addressing our previous recommendation to timely develop and
implement a plan to consolidate excess capacity at call sites.

Web site: IRS's Web site performed well according to independent rating
services. IRS's Web site is the least expensive way to provide service and
is consistent with IRS's strategy of increasing self-assistance.

Face-to-face assistance: Fewer taxpayers used IRS's walk-in sites, while
more used return preparation assistance at volunteer sites. IRS continues
to miss opportunities to assess the quality of face-to-face assistance.
Despite IRS's increased reliance on community-based volunteers to target
underserved populations, such as the elderly, IRS does not know the
effectiveness of such targeting. At its walk-in sites, IRS uses direct
observation to assess the accuracy of return preparation. However, because
this method is likely to yield biased results, IRS lacks valid performance
information. In contrast, contact recording--a system capturing the audio
portion of the assistor/taxpayer interactions and assistors' computer
screen activity--shows promise in monitoring the accuracy of tax law and
account assistance.

Taxpayer Assistance Blueprint (TAB): IRS has completed TAB, a data-driven
strategy for improving services to taxpayers, lowering costs, and
understanding the link between taxpayer service and compliance. TAB has
potential value. In the past we have stressed the importance of
reconsidering the level and types of services IRS provides to taxpayers,
such as whether to maintain the same number of walk-in sites. Realizing
the value of TAB will depend on several factors, such as future funding
and progress quantifying the link between service and compliance.

6We use "paid preparer" to refer to any individual acting alone or as an
employee of an entity who provides fee-based return preparation
assistance. Within this broad classification, there are tax practitioners
and commercial preparers. Tax practitioners, who are governed by the
Department of the Treasury Circular 230, are authorized to represent
taxpayers before IRS. They can include attorneys, certified public
accountants, and enrolled agents. Commercial preparers include
corporations and self-employed individuals who are not regulated by IRS or
governed by Circular 230. While there are currently no federal competence
standards or registration requirements for unenrolled commercial
preparers, federal legislation has been proposed to mandate Treasury to
test and certify tax return preparers.

We recommend that the Commissioner of the Internal Revenue direct the
appropriate officials to

           o determine actions needed to require software vendors to include
           bar codes on printed individual income tax returns and the cost of
           those actions;

           o determine the benefits, in terms of processing costs and
           improved enforcement, of having all return information available
           electronically;

           o determine how much electronic filing would have to increase,
           either through electronic filing mandates or bar coding, for the
           benefits of transcribing all remaining paper returns to exceed the
           costs;

           o develop estimates of the effectiveness of IRS's volunteer
           program at targeting underserved populations; and

           o determine the feasibility of using contact recording as a method
           of monitoring and improving the quality of return preparation
           assistance at IRS's walk-in sites.

           In commenting on a draft of this report (see app. II), the IRS
           Commissioner agreed with our recommendations and outlined IRS's
           actions to address those recommendations.
			  
			  Scope and Methodology

           To assess IRS's 2007 filing season performance in the key filing
           season activities compared to goals and past performance, and
           identify and assess potential improvements or efficiencies in
           filing season operations, we

           o reviewed and analyzed IRS reports, testimonies, budget
           submissions, and other documents and data, including workload
           data, data related to IRS's performance measures and goals, and
           data on taxpayer usage and other statistics such as the number of
           paid preparers;

           o observed operations at IRS's Atlanta, Ga. and Andover, Ma. paper
           processing centers, the Atlanta and Andover call sites, the Joint
           Operations Center (which manages IRS's telephone services) in
           Atlanta, and several of IRS's walk-in locations in Atlanta and
           Baltimore, Md. and selected these offices for a variety of
           reasons, including the location of key IRS managers, such as those
           responsible for telephone and walk-in site services;

           o tested for statistically significant differences between annual
           performance measures based on IRS sample data;

           o analyzed staffing data for paper and electronic filing,
           telephone assistance, and walk-in assistance;

           o reviewed information from organizations, such as Keynote
           Systems, that evaluate Internet performance;

           o interviewed IRS officials about current operations, performance
           relative to 2007 performance goals and prior filing season
           performance, trends, significant factors and initiatives that
           affected or were intended to improve performance, monitoring and
           oversight of paid tax preparers, and research conducted or planned
           to examine links between taxpayer service and compliance;

           o interviewed representatives of some of the larger private and
           nonprofit organizations that prepare tax returns, including H&R
           Block and trade organizations that represent both individual paid
           preparers, tax preparation companies, and professional
           associations, including the American Institute of Certified Public
           Accountants;

           o reviewed TIGTA reports and interviewed TIGTA officials about
           IRS's performance and initiatives; and

           o reviewed prior GAO reports and followed up on our
           recommendations made in prior filing season and related reports.

           This report discusses numerous filing season performance measures
           and data that cover the quality, accessibility, and timeliness of
           IRS's services that, based on our prior work, we consider
           sufficiently objective and reliable for purposes of this report.
           To the extent possible, we corroborated information from
           interviews with documentation and data and where not possible, we
           report the information as attributable to IRS officials. We
           reviewed IRS documentation, interviewed IRS officials about
           computer systems and data limitations, and compared those results
           to GAO standards of data reliability.7 Data limitations are
           discussed where appropriate. Finally, we conducted our work
           primarily at IRS headquarters in Washington, D.C., the Wage and
           Investment Division headquarters in Atlanta, Ga., as well as the
           other sites mentioned earlier.

			  Background

           IRS's filing season is an enormous and critical undertaking that
           consists of two primary activities, processing individual income
           tax returns and providing taxpayer assistance. It consumes more
           than $3 billion annually.

           Figure 1: IRS's 2007 Filing Season Activities

           Notes: The number of paper and electronic returns are estimated
           for the time period January 1, 2007, to September 14, 2007;
           toll-free calls for the time period January 1, 2007 to June 30,
           2007; walk-in contacts, which includes returns prepared at IRS
           walk-in sites from December 31, 2006, through April 21, 2007, and
           volunteer sites from January 1 through April 30, 2007; and
           Internet downloads for the time period January through July 2007.
           We used different dates for the various areas that best reflect
           IRS's filing season workload in that area.

           Taxpayers can file their returns by mailing paper returns to one
           of IRS's five paper processing centers or submitting the returns
           electronically.8 Electronic filing has provided IRS with
           significant cost savings. Electronic filing is faster, which
           allows taxpayers to receive refunds faster, and is less error
           prone--IRS does not have to transcribe electronic tax return
           information and built-in checks eliminate many errors that IRS has
           to address when processing paper tax returns, such as correcting
           computational mistakes and SSNs. In addition, taxpayers below an
           income ceiling can access the Free File program offered through
           IRS's Web site by a consortium of 19 tax preparation companies
           that offer free online tax preparation and filing services.
			  
7GAO, Assessing the Reliability of Computer-Processed Data, [31]GAO-02-15G
(Washington, D.C.: Sept.1, 2002).

8While taxpayers and paid preparers can mail a paper return directly to
IRS, only paid preparers and tax preparation software companies that IRS
has designated as electronic return originators (ERO) can transmit tax
returns electronically to IRS, which may involve a fee to the taxpayers.
IRS conducts suitability checks of applicants who are applying to become
EROs. These checks may include checking applicant's criminal background,
credit history, and tax compliance.

           IRS's Business Systems Modernization (BSM) program, which began
           eight years ago, is a high-risk, highly complex effort critical to
           supporting IRS's taxpayer service goals, such as increasing
           electronic filing and providing more accurate and timely responses
           to taxpayer inquiries. To date, IRS has deployed releases of
           modernized systems that have delivered substantial benefits to
           taxpayers and the agency, including e-Services (a new Web portal
           and services for paid preparers) and parts of CADE, which is the
           new taxpayer information database that facilitates faster refund
           processing and provides IRS with more up-to-date account
           information. CADE is intended to eventually replace IRS's
           antiquated Individual Master File legacy processing system, which
           is the agency's repository of taxpayer account information, and
           therefore, is the BSM program's cornerstone and highest priority
           project.9

           IRS also provides a variety of taxpayer services, including tax
           law assistance, account resolution, limited return preparation,
           tax forms and publications distribution, outreach, and education,
           mainly through its telephone operations, Web site, and
           face-to-face assistance sites. Taxpayers can call IRS's toll-free
           assistance telephone lines with questions about tax law or their
           refunds. Depending on how taxpayers respond to menu choices,
           questions are answered by an automated message or calls are routed
           to telephone assistors located at 24 call sites around the
           country. Calls are routed to the next available assistor assigned
           to answer specific questions, e.g., tax law, account, or refund
           questions.

           IRS provides many services through its Web site, including
           "Where's My Refund," which enables taxpayers to use the Web site
           to determine whether the agency received their tax returns and
           processed their refunds. Taxpayers can also download forms,
           instructions, and publications, research their own tax law issues
           through Frequently Asked Questions or Tax Topics, and receive help
           with specific tax law questions and procedural questions via
           e-mail.
			  
9IRS also has plans to replace its Business Master File legacy processing
system.			  

           IRS's volunteer program has become an increasingly important part
           of IRS's face-to-face assistance. It expanded to 66 national
           partners that include financial, social service, corporate,
           educational, and government organizations and helps IRS serve
           traditionally underserved taxpayer segments, including the
           elderly, low-income, disabled taxpayers, taxpayers with
           limited-English proficiency, Native Americans, and rural
           taxpayers. Additionally, IRS has 401 walk-in sites where taxpayers
           can ask basic tax law questions, get account information, receive
           assistance with their accounts, and have returns prepared if their
           annual income is $39,000 or less.10

           In April 2007, IRS released its final TAB report, a 5-year plan
           designed to assist the agency in providing, evaluating, and
           improving taxpayer services at lower costs. As part of its
           research into the costs of taxpayer services, IRS developed
           estimates of the cost-per-service contact for providing different
           types of taxpayer services and conducted preliminary research
           about the effect of taxpayer service on compliance.11 We have
           reported that IRS lacks quantitative estimates of the impact of
           taxpayer service and its enforcement efforts on voluntary
           compliance; TAB should help IRS obtain better estimates. We also
           have long supported IRS's research efforts to measure the tax gap,
           which is the difference between what is paid voluntarily and on
           time and what is owed, and help reduce it.12

           As we previously reported, despite the 2007 filing season being
           characterized as high-risk, in large part because of the Telephone
           Excise Tax Refund (TETR), the impact of TETR on taxpayer services
           has been much less than IRS anticipated.13
			  
10According to IRS, this limitation approximates the amount set in the
Internal Revenue Code for claiming the Earned Income Tax Credit. IRS has
required appointments for taxpayers seeking this assistance since 2003.

11The cost accounting module in IRS's Integrated Financial System is not
yet capable of producing the detailed cost information needed to perform
estimates. See, GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005
Financial Statements, [32]GAO-07-136 (Washington, D.C.: Nov. 9, 2006).

12IRS 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. See [33]GAO-07-719T .

           In addition to IRS, paid preparers are a critical part of the
           nation's tax administration system because of the wide variety of
           services they offer and their unique relationship with taxpayers.
           Paid preparers may combine several taxpayer services, including
           help understanding tax obligations, answering tax law questions,
           and providing tax forms and publications, return preparation, and
           electronic filing. In previous reports and testimony, we have
           reported that paid preparers have made serious errors, although
           undoubtedly many do their best to provide their clients with
           quality service.14
			  
			  Electronic Filing Continued to Generate Savings, Processing
			  Performance Improved, but CADE Was Delayed, and Opportunities
			  Exist to Reduce Costs and Improve Compliance

           Electronic filing and CADE both have the potential to further
           reduce IRS's costs and improve processing speed and accuracy. Many
           tax returns are still filed on paper, which increases processing
           cost, and limits information readily available for IRS's
           enforcement programs.15
			  
13The IRS Commissioner characterized this year's filing season as
high-risk because of challenges related to implementing the new Telephone
Excise Tax Refund, a split refund option that allows for direct deposits
in up to three separate accounts, and tax law changes that were enacted in
December 2006. We reported earlier this year that these challenges had
little impact on the filing season performance, in large part because
workload failed to materialize. See [34]GAO 07-720T .

14See, for example, [35]GAO-07-720T .

15IRS auditors can get the entire paper return. Consequently, all the
information can be used during an audit, but not in the automated audit
selection process.

           Electronic Filing Continues to Increase and Generate Savings

           As of September 14, 2007, IRS processed approximately 135 million
           individual income tax returns. Of those returns, approximately 79
           million (58 percent) were filed electronically and the remaining
           56 million were filed on paper. The number of returns filed
           electronically increased 9 percent over last year, which is
           greater than last year's increase and more than IRS projected.16
           One factor contributing to the growth in electronic filing is
           mandates. Thirteen states now mandate electronic filing of state
           returns, which has increased electronic filing of both state and
           federal tax returns. Despite the overall increase in electronic
           filing, taxpayer's use of the Free File program continued to
           decline. For example, as of June 21, IRS processed about 3.8
           million returns filed through the Free File program, 2 percent
           less than last year. IRS officials attributed this decline in part
           to companies offering free electronic online filing separate from
           the Free File program.

           Growth in electronic filing generates savings for IRS by reducing
           staff needed for labor-intensive paper processing.17 In 2006, IRS
           used almost 1,700 (36 percent) fewer staff for processing tax
           returns than in 1999. IRS estimates that this saved the agency $78
           million in salary, benefits, and overtime in 2006.18 In addition,
           IRS has achieved ancillary space cost savings from the closing of
           submission processing centers. IRS estimated the cost savings as a
           result of closing the Brookhaven and Memphis paper processing
           centers to be $24.9 million in 2007.19 IRS closed its Philadelphia
           paper processing center at the end of September 2007, and plans to
           close its Andover paper processing center in 2009.
			  
16The total number of returns processed during the 2007 filing season
includes 717,000 1040EZ-T forms, of which 100,000 were filed
electronically. This form was for individuals who requested a refund of
federal telephone excise tax in 2007 and, therefore, did not apply to
previous filing seasons.

17See [36]GAO-07-727 .

18TIGTA found that some technology and start-up costs were not reliable or
properly tracked (see Treasury Inspector General for Tax Administration,
Consolidation of Tax Return Processing Sites Is Progressing Effectively,
But Improved Project Management Is Needed, Reference No. 2007-40-165
(Washington, D.C.: Aug. 31, 2007).

19We have not independently verified this estimate. As we have previously
reported, IRS's cost accounting system is not yet able to support
preparation of such cost estimates. See, for example, [37]GAO-07-136.

           IRS's Processing Performance Continues to Improve

           IRS issued over 103 million refunds, totaling almost $233 billion,
           as of September 14, 2007. Nearly 60 percent of the refunds were
           directly deposited, almost 7 percent over the same period last
           year, which is important because direct deposit is faster, more
           convenient for taxpayers, and less expensive for IRS than mailing
           paper checks.

           IRS met or exceeded seven out of nine processing performance goals
           and continues a trend of improvement (see app. I for details). For
           example, IRS met or exceeded its goals for the percentage of
           errors included in letters, notices, and refunds. For eight of its
           nine measures, IRS met or exceeded its previous year's
           performance. IRS did not meet one goal and paid more interest on
           delayed refunds than expected, because of problems with a computer
           system that processes some taxpayer identification numbers and the
           inexperience of new staff. IRS did not meet its efficiency goal
           because it received fewer easy to process TETR returns than
           expected.

           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 what the processing
           performance data showed, saying the filing season went smoothly.
           Similarly, TIGTA recently reported that IRS had a successful
           filing season.20
			  
			  Delays in CADE Prevented Millions of Taxpayers from Benefiting from
			  Faster Refunds

           IRS was late in delivering its latest version of CADE, its new tax
           return database, intended to replace the legacy Individual Master
           File. CADE Release 2.2 started processing returns in early March
           but did not become fully operational until late May, nearly 5
           months behind schedule, because of problems identified during
           testing. IRS originally intended CADE to post 33 million taxpayer
           returns during 2007, more than four times the 7.4 million posted
           by CADE last year. With the delay IRS revised its estimate down to
           approximately 17 to 19 million returns, then down to 11 to 12
           million returns. As of early August, CADE had posted 11 million
           returns, or about one-third of what IRS expected, and disbursed 11
           million refunds totaling over $11 billion.
			  
20TIGTA determined that IRS's 2007 filing season was successful because
most key tax law changes were implemented correctly and IRS timely
processed returns and issued refunds and electronically filed returns
increased 9 percent over last year. See the Treasury Inspector General for
Tax Administration, The 2007 Tax Filing Season was Generally Successful,
and Most Returns were Timely and Accurately Processed, Reference No.
2007-40-187 (Washington, D.C.: Sept. 21, 2007).

           A major benefit of CADE is that it is faster than the legacy
           Individual Master File system. According to IRS officials, direct
           deposit refunds are issued by CADE 1 to 5 business days faster
           than the current legacy system, and paper check refunds are issued
           4 to 8 business days faster. Because of the delays in CADE
           millions of taxpayer refunds were not issued as fast as IRS
           planned.

           Even with the latest version of CADE deployed, last year IRS
           estimated that over $500 million more would be required to fully
           implement the individual income tax processing part of the
           system.21 Moreover, the CADE setback adversely affected IRS's
           ability to deliver the functionality planned for the next release,
           such as processing the earned income tax credit schedule, and has
           caused IRS to reconsider the functionality of other future CADE
           releases. IRS expects future releases of CADE to be linked with
           its Account Management System (AMS) releases, requiring increased
           attention to issues of synchronization and coordination between
           the two systems. According to IRS officials, CADE and AMS working
           together will enable IRS to process tax returns and address many
           taxpayer issues, such as address changes, in a near real-time
           manner, which benefits both IRS and taxpayers.

           Further complicating matters, IRS has additional plans for CADE,
           such as processing tax returns claiming the earned income tax
           credit, during the 2008 filing season. IRS is aware of these
           challenges and is working on a revised Release Content Master
           Plan, which it plans to complete by November 2007, detailing the
           capabilities and interdependencies associated with future releases
           of CADE and AMS and the plans for replacing the legacy Individual
           Master File system.22
			  
21Because of the substantial costs associated with fully implementing
CADE, the Congress could find information about the benefits of CADE, such
as faster refund timeliness, useful as an indication of both the magnitude
and likelihood of the future benefits from full implementation.
Consequently, last year we recommended that IRS report to the Congress on
refund timeliness for CADE compared to the Master File legacy system.
According to IRS officials, IRS is in the process of developing this
measure.

22The most recent release of CADE, originally scheduled for delivery in
July 2007, was deployed into production on August 8, 2007, but with
reduced functionality. This release will also interface with AMS,
currently scheduled to be deployed in October 2007 to allow address
changes for CADE accounts.	

           IRS May Be Missing Opportunities to Further Reduce Costs and Increase
			  Compliance by Not Doing More to Reduce the Number of Paper Returns
			  Processed and Transcribe all Tax Return Data

           Paper returns cost IRS tens of millions of dollars to process. In
           all of 2006, IRS received about 63 million paper returns.23 Of
           these, 60 percent (38 million) were prepared on a computer, but
           then printed and mailed to IRS. IRS codes such returns with a "V."
           IRS estimates that a paper return costs $2.36 more to process than
           an electronically filed return. This difference implies that, if
           IRS could convert all v-coders to electronic filing, IRS could
           save roughly $90 million annually. Furthermore, if all v-coders
           could be converted to electronic filing, the number of paper
           returns remaining and needing to be transcribed would be greatly
           reduced.

           Paper returns also limit the effectiveness of IRS's enforcement
           programs. To control costs, IRS does not transcribe all the lines
           on paper tax returns into its computer databases, such as
           taxpayers' telephone numbers, limiting the amount of information
           available electronically for enforcement purposes. As we
           previously reported, even small changes in the amount of
           information IRS transcribes can consume substantial resources that
           might offset some potential savings from electronic filing.24
           Further, to avoid disadvantaging taxpayers who file
           electronically, IRS has a policy of posting the same information
           from electronic and paper returns to its databases. Consequently,
           if a line is not transcribed from paper returns, it is not posted
           from electronic returns either. Only information posted to
           computer databases is readily available for use in IRS's automated
           compliance checking programs. These programs include matching tax
           return entries with information returns from third parties, such
           as Form W-2s from employers or Form 1099s from financial
           institutions, and selecting suspicious returns for audit.

           According to IRS officials, transcribing and posting more
           comprehensive information from individual income tax returns could
           facilitate the audit process, expedite contacts for faster
           resolution, reduce handling costs, allow for improved case
           selection, and potentially better define specific tax gap issues.
           Although we have not independently verified IRS's methodology, for
           one of its main enforcement programs--the Automated Underreporter
           Program--IRS officials estimate that having all tax return
           information available electronically would result in a $175
           million increase in tax revenue annually, while at the same time,
           reduce its "no-change" rate, making it less likely that IRS would
           select taxpayers for further contact where no additional tax was
           assessed, thus lowering taxpayer burden.25
			  
23Full data for 2007 is not available.

24GAO, Tax Administration: Electronic Filing's Past and Future Impact on
Processing Costs Dependent on Several Factors, [38]GAO-02-205 (Washington,
D.C., Jan. 10, 2002).

           State experiences provided some corroboration of IRS's views, as
           officials we spoke with reported that greater electronic access to
           return information allowed them to verify information on state
           returns and improved their enforcement programs while reducing the
           number of compliant taxpayers who were contacted.

           At least two options exist to increase electronic filing--mandates
           and bar coding. Last year we suggested that the Congress mandate
           electronic filing by paid preparers meeting certain criteria, such
           as a threshold number of returns.26 Mandating electronic filing
           would not convert all v-coders, because it would not apply to
           taxpayers who prepare their own returns on a computer. Still, most
           v-coders use a paid preparer (68 percent in 2006).

           Another option to increase electronic filing is bar coding of all
           printed returns prepared using commercial software. IRS has done
           preliminary research showing that 100 percent of the information
           on a return could be condensed into a bar code, which could be
           read by hand-held scanners. Consequently, bar coding produces some
           of the efficiencies of electronic filing by replacing the
           labor-intensive transcription process and eliminating
           transcription errors. However, bar coding would still require some
           processing of paper such as receiving and opening paper mail.

           Several states already require bar coding on their printed returns
           and there is an industry standard among developers and vendors for
           creating bar codes.27 Moreover, many of the largest software
           providers already support bar coding.
			  
25IRS officials said that if all data from tax returns were transcribed
and posted, the Automated Underreporting Program could eliminate human
screeners who currently review return information that has not been
transcribed or posted. IRS estimated that if the screeners could be
reallocated to performing audits, they could bring an additional $175
million annually.

26 [39]GAO-07-27 .

27According to a recent TIGTA report, some states estimate that bar codes
reduce the time and effort involved in processing paper returns by 50 to
90 percent and use of bar codes is $.57 to $.70 cheaper to process per
return than a conventional paper return. See Treasury Inspector General
for Tax Administration, Additional Action is Needed to Expand the Use and
Improve the Administration of the Free File Program, Reference No.
2007-40-105 (Washington, D.C.: June 27, 2007).

           IRS's Wage and Investment Operating Division staff developed a
           proposal for bar coding. However, Wage and Investment officials
           rejected that proposal in June 2007, in part because it involved
           upgrading a legacy system. Wage and Investment officials told us
           they are developing a new funding proposal for no earlier than
           2010, which would likely include bar coding.

           IRS, however, lacks several pieces of information that would help
           it make a decision about whether the benefits exceed the costs of
           bar coding and transcribing the residual paper returns.

           o Actions required: IRS does not know the actions needed to
           require commercial software vendors to include bar codes on
           printed returns. IRS officials told us that they have not
           conferred with the software vendors about the actions that would
           be necessary. Nor have they conferred with the states about the
           actions they took to mandate bar coding. Without knowing the
           necessary actions, IRS cannot estimate the costs and time frames
           for a bar code program.

           o Benefits: While IRS has estimates of the savings from converting
           from paper to electronic filing, it does not have estimates of the
           savings from converting paper to bar coded returns. Although it
           estimated the increased revenue possible from the Automated
           Underreporter Program, IRS does not have a complete estimate of
           the revenue gains across all its enforcement programs that would
           be realized if all tax return information were transcribed and
           posted.

           o Breakeven: IRS does not know how much electronic filing would
           have to increase, through either mandated electronic filing or bar
           coding, before transcribing the residual paper returns would pass
           a benefit/cost test.28

           Gathering the above information would have some costs to IRS.
           However, the cost savings to IRS and increased revenue could be in
           the range of hundreds of millions of dollars. Additionally,
           taxpayer compliance burden might be reduced.
			  
28Such an analysis may have to rely on estimates, since IRS's cost
accounting system is not yet capable of producing the detailed cost
information. See [40]GAO-07-136 .

           IRS Has Limited Information on Paid Preparers Who Prepare the
			  Majority of Tax Returns, but Has Efforts Underway to Acquire More

           Although they are an important part of the tax administration
           system, IRS has limited information about paid preparers. However,
           IRS has research and other initiatives under way intended to gain
           more information.

           As shown in figure 2, paid preparers have filed an increasing
           majority of all individual income tax returns over the last
           decade.29 During the 2006 filing season, paid preparers prepared
           nearly 78 million (61 percent) of the 127 million individual
           income tax returns. Of the preparer returns, nearly 70 percent
           were filed electronically.

           Figure 2: Percentage of Returns with a Paid Preparer Signature

           As we said in past reports, paid preparers are a critical
           quality-control checkpoint for the tax system and, as with IRS,
           the quality of the service they provide is important.30 However,
           we also said that some paid preparers made serious errors. For
           example, in 2006 we found that all 19 of the commercial preparers
           we visited made errors completing returns. Some of the most
           serious errors involved not reporting business income and failing
           to itemize deductions. Our limited work did not permit
           generalizing about the quality of all paid preparers' work and
           undoubtedly, many preparers do their best to prepare returns that
           are compliant with tax laws. We also previously reported that,
           while many taxpayers believe they benefited from using a paid
           preparer, millions may have been poorly served.31
			  
29GAO previously reported statistics that support that this upward trend
has existed since at least 1981. See GAO, Tax Administration: Most
Taxpayers Believe They Benefit from Paid Tax Preparers, but Oversight for
IRS Is a Challenge, [41]GAO-04-70 (Washington, D.C.: Oct. 31, 2003).

30 [42]GAO-06-563T .

           IRS has some information on paid preparers. For example, IRS
           requires paid preparers to identify themselves on all income tax
           returns they prepare by entering their SSN or PTIN. However, IRS
           does little to monitor or track basic information about individual
           paid preparers. For example, IRS does not collect information on
           the type of preparers, such as whether the preparer is an enrolled
           agent or part of a commercial chain, or the number or types of
           returns filed by preparers. Having such information could allow
           IRS to better identify filing errors and target its outreach to
           specific preparers or preparer groups.

           IRS currently has efforts under way intended to begin remedying
           the lack of information about paid preparers. One important step
           was the Return Preparer Summit, which took place in late September
           2007. According to IRS, the Summit included officials from
           multiple IRS offices who discussed how to better coordinate and
           communicate between offices with paid preparer responsibilities.
           IRS officials expect to present their findings and potential
           recommendations in March 2008 when IRS updates its recent report
           on voluntary compliance and the tax gap.32

           IRS is exploring the development of a database that will serve as
           a centralized repository of paid preparer information. IRS
           envisions that such a database could facilitate more robust
           compliance efforts and allow taxpayers to access information on
           the status of an enrolled agent. Additionally, the database could
           potentially be expanded to operate as a tracking system if
           proposed legislation mandating universal enrollment and testing of
           preparers was to be passed by the Congress.33 In the meantime, IRS
           is working to better utilize and potentially improve existing
           databases to share preparer information across its offices with
           paid preparer responsibilities.
			  
31 [43]GAO-04-70 .

32Internal Revenue Service, U.S. Department of the Treasury, Reducing the
Federal Tax Gap: A Report on Improving Voluntary Compliance (Washington,
D.C.: Aug. 2, 2007).

33 Legislation has been introduced in the Congress to regulate paid
preparers. See the Taxpayer Protection and Assistance Act of 2007, S.
1219, 110th Cong. S 1 (2007).

           Further, according to IRS, the agency plans to conduct research on
           paid preparers as outlined in TAB. Paid preparer initiatives
           include

           o studying how taxpayers select a paid preparer,

           o evaluating the scope and nature of paid preparer errors,

           o assessing IRS's outreach strategy to paid preparers, and

           o observing paid preparers' business models in order to better
           understand how to provide effective services to reduce errors.

           Paid preparers can support IRS's efforts to improve compliance.
           They assist the majority of individual income tax filers, and the
           assistance they offer can potentially help taxpayers avoid errors.
           Having additional information on paid preparers could help the
           agency identify and possibly prevent systematic errors and
           noncompliance, and could be important in guiding IRS's outreach
           and education strategies for paid preparers. TAB and other
           initiatives IRS has planned are steps that should give the
           Congress and IRS a better basis for making decisions about the
           future oversight of paid preparers.
			  
			  Access to IRS's Telephone Assistors Was Comparable to Last Year,
			  Accuracy Remains High, and IRS Is Reviewing Options for Reducing
			  Excess Capacity at Call Sites

           Access and accuracy are key measures of IRS's telephone
           performance, because IRS received 69 million calls during the
           filing season. At the same time, reducing excess capacity at call
           sites is important, because of the magnitude of IRS's telephone
           operations.
			  
			  Telephone Access Was Comparable to Last Year and Accuracy of Responses
			  to Telephone Inquiries Remains High

           Taxpayers' access to IRS's telephone assistors was comparable to
           last year and IRS's goal, as measured by level of service which is
           the percentage of taxpayers who wanted to talk with an assistor
           and actually got through and received service (see table 1).34

           For two other access measures, average speed of answer--the length
           of time taxpayers wait to get their calls answered--and taxpayer
           disconnects--the rate at which taxpayers waiting to speak with an
           assistor abandoned their calls to IRS--IRS's performance weakened
           somewhat compared to the same period last year, but the comparison
           is complicated by a policy change. As of June 30, average speed of
           answer increased about 15.4 percent and was slightly higher than
           IRS's goal, and the taxpayer disconnect rate also increased.
           According to IRS officials, both increases were due, in part, to a
           decision by IRS to disconnect fewer taxpayers waiting to speak
           with an assistor. This decision resulted in taxpayers having the
           option of either waiting to speak with an assistor or hanging up
           rather than IRS deciding for them by disconnecting the call,
           resulting in increased taxpayer choice along with increases to
           both the average speed of answer and the taxpayer disconnect rate.
           Finally, IRS officials noted that Customer Voice Portal, a new
           call queuing process that routes calls directly to available
           assistors instead of to call sites, resulted in a more equalized
           wait-time for taxpayers calling to speak with an assistor this
           year.
			  
34IRS does not have a specific productivity measure for telephone
assistance, but instead uses two measures, average handle time--the
average amount of time assistors spend assisting taxpayers--and customer
contacts resolved per staff year--the number of contacts resolved in
relation to time expended based on staff usage. As of last June, average
handle time was 10 minutes and comparable to last year and the number of
contacts resolved far surpassed IRS's goal.

Table 1: IRS Telephone Assistors Performance, 2001--2007 Filing Seasons

Telephone assistance[A]: Assistor level of service[B]; 
2001 Actual: 68.6%; 
2002 Actual: 68.6%; 
2003 Actual: 83.7%; 
2004 Actual: 85.9%; 
2005 Actual: 82.2%; 
2006 Actual: 81.0%; 
2007 Actual: 81.6%; 
Fiscal year 2007 goals: 82%. 

Telephone assistance[A]: Average speed of answer[C]; 
2001 Actual: 5.5; 
2002 Actual: 4.6; 
2003 Actual: 2.8; 
2004 Actual: 2.8; 
2005 Actual: 4.3; 
2006 Actual: 3.9; 
2007 Actual: 4.5[E]; 
Fiscal year 2007 goals: 4.3. 

Telephone assistance[A]: Taxpayer disconnect rate[D]; 
2001 Actual: 16.0%; 
2002 Actual: 14.6%; 
2003 Actual: 8.3%; 
2004 Actual: 8.6%; 
2005 Actual: 12.0%; 
2006 Actual: 10.6%; 
2007 Actual: 13.3%[E]; 
Fiscal year 2007 goals: NA. 

Source: GAO analysis of IRS data.

aTelephone assistance data are based on the date range of January 1
through June 30.

bThe percentage of callers who want to speak to an assistor who get
through and receive service.

cAverage number of minutes a taxpayer waits in queue for an assistor.

dThe percentage of callers who hang up while waiting in queue for an
assistor.

eIRS officials attributed increases in average speed of answer and
taxpayer disconnects to a conscious decision by IRS to decrease the times
IRS disconnects taxpayers, which resulted in taxpayers being able to
decide whether or not to hang up (taxpayer disconnect) or wait to speak
with an assistor (average speed of answer).

IRS estimates that the accuracy of telephone assistors' responses to tax
law and account questions was comparable to the same time period last year
and met IRS's goals. Moreover, as noted in table 2, since 2005, accuracy
has been about 90 percent or more and was significantly better than in
2001.

Table 2: IRS Telephone Assistor Accuracy Performance, 2001--2007 Filing
Seasons

Accuracy measures[A]: Tax law accuracy rate (in percent)[B]; 
2001 Actual: 79.1 +/-0.6; 
2002 Actual: 84.9 +/-0.5; 
2003 Actual: 81.3 +/-0.7; 
2004 Actual: 79.5 +/-0.8; 
2005 Actual: 89.5 +/-0.6; 
2006 Actual: 90.6 +/-0.6; 
2007 Actual: 90.7 +/-0.9; 
Fiscal year 2007 goals: 91.0. 

Accuracy measures[A]: Accounts accuracy rate (in percent)[B]; 
2001 Actual: 88.1 +/-0.6; 
2002 Actual: 90.5 +/-0.4; 
2003 Actual: 88.6 +/-0.4; 
2004 Actual: 89.0 +/-0.5; 
2005 Actual: 91.3 +/-0.4; 
2006 Actual: 93.3 +/-0.3; 
2007 Actual: 93.2 +/-0.5; 
Fiscal year 2007 goals: 93.3. 

Source: GAO analysis of IRS data.

aBased on representative samples from January through June for 2001, 2002,
2003, 2004, 2005, 2006, and 2007.

bThe percentage of calls in which telephone assistors provided accurate
answers for the call type and took the appropriate action, with a 90
percent confidence interval.

Call Demand Was Comparable to Last Year, and Telephone Service Remains Important
for Taxpayers

IRS received about 69 million calls on its toll-free telephone lines
through June 2007, which was less than expected, but slightly more than in
2006. IRS's automated service handled roughly the same number of calls as
those handled by IRS assistors, although the number of automated calls
received was fewer than last year (22.1 million), while the calls answered
by assistors was equivalent to last year.35

Figure 3: How IRS Handled Calls During 2007

Note: Data cover the period January 1 through June 30, 2007. Due to
rounding, percentages do not add to 100.

Of the calls received by IRS, 28.8 million calls were from taxpayers
trying to obtain information on the status of their tax refunds, despite
increasing use of IRS's Web site feature, "Where's My Refund." Another
22.2 million were about account questions, and 13.1 million were about tax
law questions.

35Of the 42 million calls answered by automation or assistors as of June
30, only about 716,000 were related to the telephone excise tax refunds, a
small portion of the 17.6 million expected calls.

Because millions of taxpayers continue to depend on IRS's telephone
assistance, it remains a critical part of taxpayer services. Moreover, IRS
and our prior reports have noted that assisting taxpayers with tax
questions reduces burdensome notices and inadvertent noncompliance.36 As
part of TAB and other initiatives, IRS plans to conduct more research into
the effect of telephone assistance on compliance.

IRS's telephone operations consume most of IRS's taxpayer service budget.
According to TAB, assisted telephone services accounted for 65 percent and
automated assistance accounted for 2 percent of the nearly $1 billion
total costs to the agency for providing taxpayer assistance in 2005. At
this time IRS does not have plans to automate more calls, since the agency
has already shifted easier calls to automation and Web assistance, leaving
the more difficult and time-consuming account and tax law calls that
require the attention of assistors.

In addition to answering telephones, IRS devotes resources to processing
paper inventory, such as amended returns and taxpayer correspondence at
some of its call sites. Because of limited TETR call demand, IRS closed
more paper inventory than anticipated, meaning that taxpayer issues were
resolved more quickly. As seen in figure 4, call volume has not declined
and accordingly, resources devoted to answering telephones have not
declined noticeably since 2001, while resources devoted to paper inventory
have declined almost 14 percent since 2001.

36GAO, IRS Modernization, Continued Progress Requires Addressing Resource
Management Challenges, [44]GAO-05-707T (Washington, D.C.: May 19, 2005)
and IRS Telephone Assistance: Opportunities to Improve Human Capital
Management, [45]GAO-01-144 (Washington, D.C.: Jan. 30, 2001). Internal
Revenue Service, U.S. Department of the Treasury, Reducing the Federal Tax
Gap: A Report on Improving Voluntary Compliance (Washington, D.C.: Aug. 2,
2007).

Figure 4: Telephone Assistance and Paper Inventory Resources by Workload

Note: The figure includes data for entire fiscal years, not just for the
filing season.

IRS has initiatives to expand and improve on telephone services including

           o Centralized Customer Contact Forecasting and Scheduling to
           modernize the current system of workload forecasting, scheduling,
           and tracking workload and training requirements.

           o Working groups looking into ways of improving taxpayer services,
           such as developing ways to synchronize telephone message
           information with Web site services to better link different
           service channels. IRS's goal is to revise the messages heard by
           taxpayers calling to speak with assistors after business hours,
           during holidays, or when telephone lines are too crowded to
           accommodate them, so that taxpayers are told not only when to try
           back, but are also referred to IRS's Web site for further
           information.
			  
			  IRS Is Reviewing Options for Reducing Excess Capacity at Call Sites

           Last year we recommended that IRS timely develop, validate, and
           implement a plan to consolidate call sites because, at the filing
           season's peak, IRS determined that it had 850 unused assistor
           workstations spread across its 24 call sites.37 According to IRS
           officials, the number of unused workstations has not changed. IRS
           completed a workload analysis designed to evaluate changes in
           telephone staff resources and call demand and used business
           criteria, such as the types of calls answered at call sites and
           facility and employee costs, to identify call sites for potential
           closure. IRS plans to conduct an extensive cost-analysis review of
           different options for reducing excess capacity prior to
           potentially closing any sites, has secured funding for the
           analysis, and is in the process of obtaining a contractor to
           assist with the review.
			  
			  Web Site Performance Remains High, and Initiatives Are On-going to
			  Enhance Web Capabilities and User Experience

           Web site performance remains high, which is important because
           IRS's Web site is used by millions of taxpayers, is available to
           taxpayers 24 hours a day, is much less costly than other types of
           assistance, and will remain important as more taxpayers use
           self-assistance.

           Use of IRS's Web site increased this filing season compared to
           prior years' except for downloads of files such as tax forms and
           publications, as shown in table 3 below. According to IRS
           officials, one reason for the decrease in downloads is the
           conversion of IRS publications and instructions from file format
           to another format, which IRS does not count as part of downloads.
           Additionally, the increased use of electronic filing and tax
           preparation software reduces the need for taxpayers to download
           tax forms and publications. However, because of the decline, IRS
           will continue to monitor the number of downloads and identify
           possible issues associated with downloading files.
			  
37 [46]GAO-07-27 .			  

           Table 3: IRS Web Site Use, 2006 and 2007 (data are in thousands)
			  
Uses: Visits[A]; 
2006: 152,345; 
2007: 168,332; 
Percentage change: 110.5. 

Uses: Downloads[A]; 
2006: 160,477; 
2007: 120,596; 
Percentage change: -24.9. 

Uses: Searches[A]; 
2006: 88,250; 
2007: 101,072; 
Percentage change: 14.5. 

Uses: Whereï¿½s My Refund[B]; 
2006: 30,663; 
2007: 40,325; 
Percentage change: 31.5. 

Uses: Number of TETR-related visits[C]; 
2006: N/A; 
2007: 4,570; 
Percentage change: N/A. 			  

           Source: GAO analysis of IRS data.

           Note: N/A means not applicable.

           aWeb site visits, searches, and downloads are from January through
           July 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
           accessing the site.

           bFor January 1 through July 29, 2006, and July 28, 2007.

           cVisits to a Web page specific to TETR, which was not operational
           in 2006. Data are for October 1, 2006, through June 9, 2007.

           Evidence that IRS's Web site is performing well includes the
           following:

           o According to the American Customer Satisfaction Index, for the
           2007 filing season, January 1 through April 17, 2007, IRS's Web
           site scored above other government agencies, nonprofits, and
           private sector firms for customer satisfaction (74 for IRS versus
           72 for all government agencies versus 71 for all business
           surveyed), and better than during the 2006 filing season.38

           o An independent weekly study by Keynote Systems, Inc., a company
           that evaluates Web sites, reported that, as of July 16, 2007,
           IRS's Web site repeatedly ranked in the top 6 out of 40 government
           agency Web sites evaluated in terms of average download time.

           o According to IRS, the number of e-mails and telephone calls to
           the Web site HelpDesk decreased compared to the 2006 filing
           season, and average page views per visit decreased, indicating
           that visitors to the Web site are finding information more
           quickly.

           Additionally, this year IRS implemented a new sales tax deduction
           calculator, which IRS wants to use as a standard for developing
           other online calculators, and updates to the Free File,
           Alternative Minimum Tax, and Earned Income Tax Credit
           applications.39 Also, this year the "Where's My Refund" feature
           allowed taxpayers to check on the status of split refunds, and
           told the taxpayer if one or more deposits were returned from the
           bank because of an incorrect routing or account number.
			  
38The American Customer Satisfaction Index tracks trends in customer
satisfaction and is considered to be an industry leader.

           IRS has initiatives to expand and improve on its Web site
           services.

           o Tax Law Support Tools will provide Web site self-assistance
           tools to taxpayers and other external stakeholders, allowing users
           to conduct keyword and natural language queries.

           o The first release of Internet Customer Account Services will
           allow individual taxpayers to view their account information
           online and is expected to be deployed in July 2008.

           o A Spanish version of "Where's My Refund" will enable Spanish
           speaking taxpayers to check refund status and receive account
           information.
			  
			  Taxpayer Assistance Continued to Grow at Volunteer Sites and Decline
			  at IRS's Walk-in Sites; While Quality has Improved in Some Areas, More
			  Reliable Data Are Needed

           Volunteer sites play an increasingly important role in the tax
           system and are part of IRS's and the Department of Treasury's
           integrated multiyear strategy to reduce the tax gap by better
           identifying and recruiting partners that are more skilled than IRS
           at reaching underserved taxpayers, including the elderly,
           disabled, low-income, Native American, and rural taxpayers.
           Volunteer sites prepared 2.4 million returns, an increase of 17
           percent over last year and higher than projected through April 21,
           2007. As illustrated in figure 5, this is consistent with previous
           trends for volunteer and walk-in sites. Return preparation at
           volunteer sites has more than doubled since 2001, while return
           preparation at IRS's walk-in sites has declined by almost 74
           percent during the same period.
			  
39 According to IRS, the sales tax deduction calculator allows taxpayers
to figure out the amount of optional general sales tax they are eligible
to claim.

           Figure 5: Trends in Face-to-face Return Preparation, 2001 through
           2007

           Note: For walk-in sites, data covers the time periods of December
           31, 2006 through April 21, 2007. 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.

           Increased return preparation assistance at volunteer sites, rather
           than at walk-in sites, allows IRS to devote more resources to
           services such as account assistance, which can only be provided by
           IRS staff. Further, TAB data show return preparation assistance
           provided at walk-in sites is four times more expensive per return
           than at volunteer sites. Moreover, TAB data show that walk-in
           sites are used by a small percentage of taxpayers, yet account for
           over 20 percent or, $201 million, of the almost $1 billion spent
           on taxpayer assistance in 2005.

           Despite an increase in the number of returns prepared at volunteer
           sites, the quality of volunteer-prepared returns remains largely
           unknown and what is known is not statistically reliable. IRS's
           current initiative to monitor the quality of returns at volunteer
           sites is in its second year of implementation and includes mystery
           shopping, site and return reviews.40 However, according to IRS
           officials, volunteer sites had advanced notice of site and return
           reviews, but not mystery shopping. Consequently, IRS acknowledged
           that the advance notice of these reviews was likely to bias the
           results.

           While IRS plans to continue to perform site and return reviews in
           2008, officials said that following a sampling plan that would
           yield results that could be generalized to the universe of
           volunteer sites would be too costly. Instead, IRS plans to conduct
           unannounced return reviews, continue site reviews, and increase
           the number of mystery shopping visits from the 39 done in 2007 to
           100. According to IRS officials, mystery shopping yields the best
           evaluative result of the three reviews IRS uses to assess the
           quality of volunteer-prepared returns. We agree that having
           unannounced visits and increasing the number of mystery shopping
           visits is likely to yield a better evaluative result than the
           potentially biased methods previously used for monitoring return
           preparation. Furthermore, we and TIGTA acknowledge the
           difficulties in collecting statistically valid information about
           return preparation assistance at volunteer sites.41

           In addition to quality, IRS uses some other measures to monitor
           the performance of its volunteer program, such as the number of
           returns prepared, percentage prepared electronically, and the
           satisfaction of its partners, such as financial, social service,
           corporate, and government organizations. While useful, these
           measures do not reflect the extent to which the volunteer program
           improves taxpayer compliance and participation in programs such as
           the earned income tax credit. IRS has increased its reliance on
           the volunteer program and plans to commit more resources. However,
           as we testified earlier this year, IRS's budget submission did not
           include basic performance information about the program.42 More
           specifically, IRS does not know the extent to which the program
           influences the taxpaying behavior of its target populations.
			  
40Mystery shopping involves IRS officials visiting volunteer sites posing
as taxpayers to assess the experience of the taxpayer. Site reviews assess
whether volunteer preparers were adhering to minimum quality standards
required by all sites. Return reviews determine whether the tax law was
applied properly for critical items and resulted in an accurate return
based on the taxpayer interview and supporting documentation.

41Treasury Inspector General for Tax Administration, Internal Revenue
Service FY 2008 Budget Request, (Washington, D.C.: 2007).

42 [47]GAO-07-719T .			  

           Regarding IRS's walk-in sites, IRS recently started implementing
           contact recording intended to better measure the accuracy of tax
           law and account assistance.43 As shown in figure 6, contact
           recording automatically captures the audio portion of a taxpayer
           contact and synchronizes it with an IRS walk-in site assistor's
           computer screen activity. With the exception of a microphone that
           sits atop the desk of the walk-in site assistor, contact recording
           is similar to the system IRS uses to monitor and assess the
           quality of telephone interaction between taxpayers and telephone
           assistors. IRS has deployed contact recording at 127 of its 401
           walk-in sites, which represents 46 percent of walk-in site
           contacts. As of May 26, 2007, IRS data show accuracy rates of 85
           percent for accounts assistance and 80 percent for tax law
           assistance, and IRS officials expect accuracy rates to improve as
           IRS deploys contact recording at more sites.44

Figure 6: Contact Recording at Walk-in Sites

Although IRS currently has plans to fully deploy the contact recording
systems to all walk-in sites by 2009, contact recording is not included in
its plans to assess the quality of return preparation assistance.45 IRS
intends on relying on managerial observation of employee/taxpayer
interactions while providing return assistance. We have previously
reported that employees' performance could be influenced by the knowledge
that they are being observed by managers, biasing the results.
Additionally, managers were not consistently coding employee
performance.46 Consequently, without an unbiased method, IRS lacks
reliable information to assess performance, establish obtainable goals,
and measure progress toward goals.47

43According to IRS officials, the benefits of contact recording include,
for example, IRS's ability to monitor site activity, train employees, and
improve quality of service without having to visit the site. Importantly,
contact recording provides managers with a statistically valid sample.

44The accuracy measures include precision margins of +/- 2 percentage
points.

According to IRS officials, contact recording used to measure the accuracy
of tax law and account assistance could be extended to include return
preparation assistance. For example, the equipment is already at many of
the sites--it is used to measure the accuracy of tax law and account
assistance, but turned off for return assistance. IRS officials said that
IRS had not yet determined the feasibility of using contact recording for
return assistance. IRS officials were concerned that contact recording, as
it is currently configured, might miss some aspects of return preparation
assistance, such as verifying taxpayers' documents. Further, IRS officials
noted that because it takes longer to prepare a return than answer a tax
law or account question, managerial review of return preparation takes
longer than for tax law or account assistance. However, officials also
noted that managers would be likely to spend the same amount of time using
the manager observation method as with contact recording but manager
observation would not yield reliable results. Without fully determining
the feasibility of using contact recording for return assistance, IRS will
not know if the concerns could be addressed and the existing equipment
could be more fully utilized.48

45There are challenges that may delay further deployment. First, according
to IRS officials and a recent TIGTA report, contact recording will have to
compete with other systems that may have priority--see the Treasury
Inspector General for Tax Administration, System Updates and Control
Improvements Are Needed to Ensure Contact Recording Will Provide an
Accurate Assessment of Taxpayer Assistance Quality, Reference No.
2007-40-115 (Washington, D.C.: July 9, 2007). Second, many walk-in sites
will not be able to accommodate contact recording without additional
modifications to the offices. Finally, IRS is in the process of evaluating
the viability of its walk-in sites to determine which and how many of its
sites should be consolidated, expanded or closed.

46 [48]GAO-05-51 .

47GAO, Tax Administration: IRS Improved Performance in the 2004 Filing
Season, but Better Data on the Quality of Some Services are Needed,
[49]GAO-05-67 (Washington, D.C.: Nov. 10, 2004).

The Value of TAB Depends on Funding and Ability to Link Taxpayer Service to
Compliance

TAB is a data-driven strategy that includes the results of extensive
research designed to assist IRS in better understanding taxpayers' service
needs.49 For example, TAB research included several surveys that provided
IRS with information about the services that taxpayers use or would use.
TAB also provides plans to improve taxpayer services and a multiyear
portfolio of research designed to provide information on the value of IRS
services to taxpayers and partners and the effect of taxpayer service on
compliance. According to IRS officials, with TAB, they now have more
information about taxpayers than ever before.

IRS developed estimates of the cost-per-service contact for providing
different types of taxpayer services, although there were qualifications
to those estimates.50 According to TAB, these estimates will provide a
baseline methodology for computing and comparing the costs of services in
the future. Having reliable cost information, together with a better
understanding of taxpayers' preferences, needs, and expectations, will
assist IRS in determining whether it can provide taxpayers with the same
services and benefits at lower cost through alternative methods. As table
4 shows, these costs vary widely depending on the type of service
provided.

48Additionally, by extending contact recording to return preparation, IRS
would have an opportunity to learn more about the steps taxpayers and
preparers need to follow to ensure filing accurate returns.

49IRS issued TAB reports in two phases. Phase I outlined the results of
preliminary research on taxpayer expectations and established five
strategic themes for improving taxpayer services including optimizing use
of partner services (e.g., paid preparers and community-based
organizations) and elevating self-service options, such as on IRS's Web
site. Phase II included research results on taxpayer service needs and
preferences and 54 recommended initiatives for service improvements.

50IRS qualified these estimates by noting that they do not fully allocate
all indirect overhead and support costs and represent the average cost per
contact rather than the marginal costs per contact, which could be
significantly lower due to the unused capacity and fixed costs associated
with many services. Moreover, we previously commented on long-standing
limitations in IRS's cost accounting capabilities (see for example,
[50]GAO-07-310 and [51]GAO-07-247 ). However, it is our determination that
IRS is a competent source for these cost estimates, which seem to be
reasonable; therefore, we consider these estimates to be sufficiently
reliable for describing how IRS could potentially use the information to
provide taxpayer services at a lower cost.

Table 4: IRS's Fiscal Year 2005 Estimated Unit Costs

Service: Answering tax law questions via e-mail; 
Estimated cost-per-contact: $52.51. 

Service: Providing assistance at walk-in sites; 
Estimated cost-per-contact: $28.73. 

Service: Answering correspondence; 
Estimated cost-per-contact: $24.97. 

Service: Providing assistance by assistors via toll-free telephones; 
Estimated cost-per-contact: $19.46. 

Service: Providing assistance through VITA sites; 
Estimated cost-per-contact: $12.01. 

Service: Providing assistance by automation via toll-free telephones; 
Estimated cost-per-contact: $0.71. 

Service: Providing assistance such as downloads and searches on IRSï¿½s 
Web site; 
Estimated cost-per-contact: $0.13. 

Source: GAO analysis of IRS data.

TAB has potential value. In the past, we have stressed the importance of
reconsidering the level and types of services IRS provides to taxpayers,
such as whether to maintain the same number of walk-in sites.51 While we
support IRS's efforts to develop a data-driven strategy, the value of TAB
will depend on several factors, such as

           o Quantifying the linkage between taxpayer service and voluntary
           compliance. As noted above, TAB outlines a research portfolio that
           includes additional research on the impact of taxpayer service on
           voluntary compliance, which is consistent with the Department of
           Treasury tax gap report. According to TAB, a better understanding
           of the causes of noncompliance and the impact of specific taxpayer
           services on compliance would allow IRS to focus investments in
           taxpayer service to positively impact compliance. However, TAB
           recognizes that previous research has shown that quantifying this
           linkage is difficult.

           o Coordinating and managing oversight responsibilities for TAB
           initiatives. IRS recently established a TAB Program Management
           Office responsible for facilitating, coordinating, and integrating
           TAB activities. The Program Management Office currently does not
           have authority to allocate funding for initiatives, and TAB
           officials said that it could be difficult to develop initiatives
           that require funding or coordination between different
           organizations without such authority.
           o Obtaining funding. While some of the initiatives under TAB are
           funded mostly as extensions of existing efforts, most are not yet
           funded, and TAB does not contain any information related to how
           much, as a whole, it will cost. According to IRS, unfunded and
           future initiatives will have to compete with other IRS projects
           for funding within approved annual budgets.
			  
51See GAO, IRS's 2002 Tax Filing Season: Returns and Refunds Processed
Smoothly; Quality of Assistance Improved, [55]GAO-03-314 (Washington,
D.C.: Dec. 20, 2002).			  

           o Including submission processing services. IRS officials
           acknowledge that submission processing is a significant component
           of service delivery and must be integrated into TAB. The timely
           processing of returns supports tax compliance and possibly reduces
           the need for taxpayer services.
			  
			  Conclusions

           Over the last decade, IRS has improved its performance processing
           tax returns and providing taxpayer assistance. We see value in two
           IRS initiatives intended to further improve this performance. TAB,
           besides being a data-driven strategy for further improving
           service, may provide IRS with a better understanding of the effect
           of taxpayer service on compliance and thus of the return on IRS's
           large investment in service. Similarly, obtaining more information
           about paid preparers is valuable because doing so should give the
           Congress and IRS a better basis for making decisions about the
           future oversight of paid preparers.

           In addition to these initiatives, we have identified other
           potential means for improving service. One opportunity is to
           increase electronically filed returns, either through mandates or
           bar coding, and transcribing the remaining lines on residual paper
           returns. However, IRS does not have the benefit/cost estimates
           that would be useful to make decisions about how to proceed. In
           particular, IRS does not know the actions needed to require
           software vendors to include bar codes on printed individual income
           tax returns and the cost of those actions; the benefits, in terms
           of processing costs and improved enforcement, of having all
           information available electronically; and how much electronic
           filing would have to increase for the benefits of transcribing all
           remaining paper returns to exceed the costs. Such information
           would allow IRS to compare the costs of additional transcription
           to the benefits of processing costs savings, additional
           enforcement revenues and reduced taxpayer burden.

           Additionally, despite increasing reliance on volunteer
           organizations to target underserved taxpayer groups, IRS lacks
           information on the effectiveness of its efforts. Finally, while
           IRS has been implementing contact recording at walk-in sites to
           monitor the accuracy of tax law and account assistance, it has not
           determined the feasibility of extending contact recording to its
           low-income return preparation assistance program. In both cases,
           the missing information impedes IRS's ability to make data-based
           decisions about how to improve assistance to underserved
           taxpayers.
			  
			  Recommendations for Executive Action

           We recommend that the Acting Commissioner of Internal Revenue
           direct the appropriate officials to

           o determine actions needed to require software vendors to include
           bar codes on printed individual income tax returns and the cost of
           those actions;

           o determine the benefits, in terms of processing costs and
           improved enforcement, of having all return information available
           electronically;

           o determine how much electronic filing would have to increase,
           either through electronic filing mandates or bar coding, for the
           benefits of transcribing all remaining paper returns to exceed the
           costs;

           o develop estimates of the effectiveness of IRS's volunteer
           program at targeting underserved populations; and

           o determine the feasibility of using contact recording as a method
           of monitoring and improving the quality of return preparation
           assistance at IRS's walk-in sites.
			  
			  Agency Comments and Our Evaluation

           The Acting Commissioner of Internal Revenue provided written
           comments in a November 7, 2007 letter in which she agreed with all
           our recommendations and outlined IRS's actions to address those
           recommendations. With respect to reducing processing costs and
           improving enforcement, IRS plans on specifically addressing these
           recommendations in a report to the Congress. With respect to
           assessing the effectiveness and quality of IRS's face-to-face
           services, IRS reported it plans to develop methods of estimating
           how it can provide better face-to-face assistance.

           As agreed with your offices, unless you publicly announce its
           contents earlier, we plan no further distribution of this report
           until 30 days after its date. At that time, we will send copies of
           this report to the Secretary of the Treasury; the Acting
           Commissioner of Internal Revenue; the Director, Office of
           Management and Budget; relevant congressional committees; and
           other interested parties. This report is available at no charge on
           GAO's web site at [52]http://www.gao.gov .

           For further information regarding this testimony, please contact
           James R. White, Director, Strategic Issues, on 202-512-9110 or
           [53][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; Jennifer McDonald; Paul B. Middleton;
           Emily Norman; Karen O'Conor; Cheryl Peterson; Neil Pinney; and
           Lerone Reid.

           If you or your staffs have any questions, please contact me at
           (202) 512-9110 or [54][email protected] .

           James R. White
			  Director, Tax Issues Strategic Issues
			  
			  Appendix I: IRS's Processing Performance Relative to 2001-2006
			  Performance and 2007 Goals

           As of June 30, the Internal Revenue Service met or exceeded seven
           out of nine processing performance goals and continues a general
           trend of improvement. As shown in table 6 below, IRS met or
           exceeded its goals for the percentage of errors included in
           letters, notices, refunds, and deposits; deposit timeliness (i.e.,
           interest foregone by untimely deposits); and productivity. IRS met
           its goal for refund timeliness but did not meet its goals for
           refund interest paid and Individual Master File efficiency. IRS
           officials said that the lighter than expected TETR volume meant
           that IRS's goal for Individual Master File efficiency could not be
           achieved because TETR returns were the easiest to process.
           Additionally, problems with a computer system that processes some
           taxpayer identification numbers and the inexperience of new staff
           adversely affected performance on refund interest paid. Table 5
           also shows that IRS's processing performance has significantly
           improved in some areas, such as the deposit and refund error
           rates, since 2001.

Table 5: IRS's Processing Performance, Fiscal Years 2001--2007

Measure name: Deposit error rate[C]; 
Definition: Percentage of payments applied in error by, for example, 
reimbursing a taxpayer who overpaid when the taxpayer wanted the 
overpayment credited to next yearï¿½s tax bill;
Fiscal year 2002 actual: 4.8%(+/-.3%); 
Fiscal year 2003 actual: 4.2%(+/-.3%); 
Fiscal year 2004 actual: 3.5%(+/-.31%); 
Fiscal year 2005 actual: 2.2% (+/-.26%); 
Fiscal year 2006 actual: 1.6%(+/-.24%); 
Fiscal year 2007 actual (through June)[B]: 1.3%(+/-.25%); 
Fiscal year 2007 goal: 1.5%. 

Measure name: Deposit timeliness ï¿½ paper; 
Definition: Interest foregone by not depositing monies the business day 
after receipt, per $1 million in deposits. Measure assumes an 8 percent 
interest rate; 
Fiscal year 2001 actual[A]: Not comparable because of revisions to the 
measure; 
Fiscal year 2002 actual: Not comparable because of revisions to the 
measure; 
Fiscal year 2003 actual: Not comparable because of revisions to the 
measure; 
Fiscal year 2004 actual: $407; 
Fiscal year 2005 actual: $390; 
Fiscal year 2006 actual: $354; 
Fiscal year 2007 actual (through June)[B]: $343; 
Fiscal year 2007 goal: $380. 

Measure name: Letter error rate[C]; 
Definition: Percentage of letters issued to taxpayers with errors 
(includes systemic errors)[D]; 
Fiscal year 2001 actual[A]: Not comparable because of revisions to the 
measure; 
Fiscal year 2002 actual: 7.4%(+/-.6%); 
Fiscal year 2003 actual: 7.1%(+/-.5%); 
Fiscal year 2004 actual: 6.6%(+/-.38%); 
Fiscal year 2005 actual: 3.1% (+/-.30%); 
Fiscal year 2006 actual: 3.6%(+/-.34%); 
Fiscal year 2007 actual (through June)[B]: 2.3%(+/-.37%); 
Fiscal year 2007 goal: 3.0%. 

Measure name: Notice error rate[C]; 
Definition: Percentage of incorrect notices issued to taxpayers 
(includes systemic errors)[D]; 
Fiscal year 2001 actual[A]: Not comparable because of revisions to the 
measure; 
Fiscal year 2002 actual: 18.7%(+/-2.4%); 
Fiscal year 2003 actual: 9.4%(+/-1.2%); 
Fiscal year 2004 actual: 9.5%(+/-1.3%); 
Fiscal year 2005 actual: 9.2% (+/-1.6%); 
Fiscal year 2006 actual: 5.4%(+/-1.1%); 
Fiscal year 2007 actual (through June)[B]: 4.3%(+/-1.0%); 
Fiscal year 2007 goal: 7.3%. 

Measure name: Refund error rate - individual (paper)[C]; 
Definition: Percentage of refunds with IRS-caused errors in the entity 
information (e.g., incorrect name, Social Security number, or refund 
amount); includes systemic errors.[D] 
Fiscal year 2001 actual[A]: 9.8%; 
Fiscal year 2002 actual: 8.0%(+/-.46%); 
Fiscal year 2003 actual: 5.3%(+/-.41%); 
Fiscal year 2004 actual: 4.9%(+/-.44%); 
Fiscal year 2005 actual: 5.0% (+/-.48%); 
Fiscal year 2006 actual: 4.5%(+/-.46%); 
Fiscal year 2007 actual (through June)[B]: 2.8%(+/-.41%); 
Fiscal year 2007 goal: 4.6%. 

Measure name: Refund interest paid; 
Definition: Amount of refund interest IRS paid per $1 million of 
refunds issued; 
Fiscal year 2001 actual[A]: Not comparable because of revisions to the 
measure; 
Fiscal year 2002 actual: Not comparable because of revisions to the 
measure; 
Fiscal year 2003 actual: $36.29; 
Fiscal year 2004 actual: $20.55; 
Fiscal year 2005 actual: $29.21; 
Fiscal year 2006 actual: $30.12; 
Fiscal year 2007 actual (through June)[B]: $36.09; 
Fiscal year 2007 goal: $34.00. 

Measure name: Refund timeliness - individual (paper)[C]; 
Definition: Percentage of refunds issued within 40 days or less; 
Fiscal year 2001 actual[A]: 95.2%; 
Fiscal year 2002 actual: 98.2%(+/-.32%); 
Fiscal year 2003 actual: 98.8%(+/-.26%); 
Fiscal year 2004 actual: 98.3%(+/-.17%); 
Fiscal year 2005 actual: 99.2% (+/-.18%); 
Fiscal year 2006 actual: 99.3%(+/-.13%); 
Fiscal year 2007 actual (through June)[B]: 99.3%(+/-.18%); 
Fiscal year 2007 goal: 99.2%. 

Measure name: Productivity; 
Definition: Weighted volume of documents processed per staff year 
expended at the processing centers; 
Fiscal year 2001 actual[A]: 30,133; 
Fiscal year 2002 actual: 28,389; 
Fiscal year 2003 actual: 30,179; 
Fiscal year 2004 actual: 30,405; 
Fiscal year 2005 actual: 31,444; 
Fiscal year 2006 actual: 33,237; 
Fiscal year 2007 actual (through June)[B]: 33,535; 
Fiscal year 2007 goal: 32,640. 

Measure name: Master File efficiency; 
Definition: Measure of Individual Master File returns processed per 
staff year expended; 
Fiscal year 2001 actual[A]: Measure not in existence; 
Fiscal year 2002 actual: Measure not in existence; 
Fiscal year 2003 actual: Measure not in existence; 
Fiscal year 2004 actual: Measure not in existence; 
Fiscal year 2005 actual: 14,965; 
Fiscal year 2006 actual: 16,124; 
Fiscal year 2007 actual (through June)[B]: 23,532; 
Fiscal year 2007 goal: 24,650. 

Source: GAO.

Note: GAO analysis of IRS data.

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

bThe measures for fiscal year 2006 are through July 31, which were the
latest data available at the time we ended our audit work. According to
IRS officials, the 2006 results through July 31 are reflective of IRS's
performance during the filing season. In addition, IRS officials told us
that the results for the measures should not change significantly through
September 30.

cIRS estimates these measures to have a 90 percent confidence interval.

dSystemic errors are computer-generated errors over which a particular
processing center would have no control.

Appendix II: Comments from the Internal Revenue Service

Commissioner: 
Department Of The Treasury: 
Internal Revenue Service: 
Washington, DC 20224: 

November 7, 2007: 

Mr. James R. White: 
Director, Tax Issues: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. White: 

I have reviewed your draft report entitled Tax Administration: 2007 
Filing Season Continues Trend of Improvement, but Opportunities to 
Reduce Costs and Increase Tax Compliance Should be Evaluated. I 
appreciate your recognition of our significant achievements in 
successfully delivering the 2007 filing season, which as you note 
continues a long-term trend of continually improving IRS services to 
taxpayers. 

Processing ï¿½ We had an outstanding filing season, successfully 
implementing significant and sometimes extremely late tax law changes. 
Through September 28, 2007, we processed over 134 million individual 
income tax returns and issued over 103 million refunds, totaling nearly 
$234 billion. 

Electronic filing grew again this year with 78.7 million, or 58.5 
percent, of individual taxpayers filing electronically. The remaining 
55.9 million were filed on paper. The number of returns filed 
electronically increased 9 percent over last year, which exceeds the 6 
percent increase we achieved in the prior year. So far, this year's e-
file rate has also exceeded our projection for an 8 percent increase 
for the year. 

The most significant increase in e-file occurred in the number of 
taxpayers who filed from their home computer. Over 22.4 million returns 
were filed from home, nearly an 11 percent increase from the prior 
year. Over 3.8 million taxpayers took advantage of the free online 
filing services offered by the Free File Alliance. Also notable is the 
fact that over 66.6 million taxpayers electronically signed their 
electronic returns, further increasing the efficiency of e-file. 
Additionally, more than 65,000 individuals have registered for e-
services and over 53 percent of applications to electronically file 
were submitted online.
Through May 2007, the IRS received 84.5 million individual tax returns 
with Telephone Excise Tax Refund (TETR) claims totaling $3.6 billion. 
The IRS processed over 600,000 paper, and 100,000 e-file, Forms 1040EZ-
T for taxpayers without a return filing requirement that claimed the 
TETR. The IRS also received 400,000 business tax returns with TETR 
claims totaling $204.5 million. 

For the first time, the IRS offered taxpayers the opportunity to split 
their refunds and direct deposit them into multiple accounts. We 
successfully processed approximately 80,000 split refund requests, 
which was significantly lower than the anticipated 1.4 million. 
However, several major software vendors did not provide the ability to 
split refunds in their tax preparation software and may have 
contributed to the lower than expected volume. 

Late passage of the Tax Relief and Health Care Act of 2006 included an 
extension of the tuition and fees deduction, state and local sales tax 
deduction, and the deduction for educator expenses. The late passage of 
this legislation caused IRS delays in processing some returns until mid-
February. Nonetheless, the IRS successfully managed taxpayer, 
practitioner, and tax software-provider expectations through extensive 
information and outreach. As a result, there were minimal negative 
consequences for taxpayers from this delay. 

Successful Implementation of the Customer Account Data Engine (CADE) 
continued during 2007. Release 2.2, although delayed, successfully 
deployed in March 2007 followed by the successful deployment of Release 
3.1 into production in August 2007. This portion of Release 3.1 
introduced Disaster Area Designation Processing into CADE and has 
resulted in the ability to maintain over 616,000 accounts within CADE 
that would have returned to the Individual Master File without this 
functionality. The second portion of Release 3.1 introduces online 
address changes, which enables CADE to process and post address changes 
for the first time. In addition to faster refunds, these new 
functionalities working together set the framework to enable IRS to 
post additional account changes in a near real-time manner in the 
future. As of September 28, 2007, CADE posted over 11.2 million returns 
and disbursed over 10.9 million refunds for over $11.6 billion. 

Telephone Service - We appreciate your recognition that customer access 
was better this year than last year. This increase in access was made 
possible through proper planning and the IRS ability to quickly respond 
to actual demand by redeploying resources. Although we overestimated 
the demand for telephone assistance related to TETR, the demand for 
other telephone assistance services was slightly higher than last year. 
We achieved an 81.6 percent Level of Service for the filing season, 
exceeding the planned Level of Service of 81.1 percent and ended the 
fiscal year at 82.1 percent, exceeding the goal of 82 percent. We also 
successfully managed our staffing to ensure non-telephone 
correspondence inventories were maintained at levels below Fiscal Year 
2006. 

In October 2006, we transitioned to Customer Voice Portal, which is a 
key telephone technology implemented to improve customer experience by 
equalizing wait times within the various topics. This revealed 
approximately nine to twelve seconds that was not previously accounted 
for when calculating the length of time a caller waits before 
connecting to an agent. We report the average of this wait time as 
average speed of answer (ASA). This additional time increased our ASA. 
Despite this, we achieved an ASA of 273 seconds, four seconds higher 
than the planned filing season ASA of 269 seconds, and delivered a 
fiscal year ASA of 266 seconds, six seconds above the goal of 260 
seconds. 

During peak periods, we will sometimes advise the taxpayer to call back 
at a less busy time and disconnect the call. In an effort to improve 
the customer experience this year, we administered fewer courtesy 
disconnects up front allowing customers to determine how long they were 
willing to wait to receive assistance. This decision contributed to a 
10 percent decrease when combining taxpayer and courtesy disconnects 
for the filing season. 

We appreciate your continued recognition of our improvement and high 
performance in the accuracy of our tax law and account answers on the 
toll-free telephone lines. The 2007 accuracy rates for toll-free tax 
law and accounts surpassed FY 2006 achievements. Through September 
2007, we achieved a Toll-Free Tax Law accuracy rate of 91.2 percent. We 
continually focus on identifying defects and provide the information to 
call sites to share with telephone assistors. Through September 2007, 
the Toll-Free Accounts accuracy rate was 93.4 percent. Accuracy gains 
can be attributed to the improved quality review process, conference 
calls held to address specific tax law or accounts topics, and Contact 
Recording that allows managers to listen to and review recorded 
customer contacts as a part of performance feedback to employees. 
Customer satisfaction for toll-free through July was 94 percent, with a 
2 percent dissatisfaction rate demonstrating the excellent service that 
we continue to provide our customers. 

Website ï¿½ The IRS website, IRS.gov, is consistently one of the most 
heavily used government sites. So far in 2007, our website has been 
visited more than 214 million times, a 10.3 percent increase over 2006. 
These visits resulted in more than 1.3 billion page views, an almost 4 
percent increase over 2006. Visits are the measurement of actions 
beginning when a visitor views their first web page on IRS.gov and ends 
when the visitor leaves our website. Taxpayers and practitioners also 
downloaded more than 128 million forms, publications, instructions, and 
other documents. 

Walk-In Assistance - During the 2007 filing season, the IRS continued 
to provide services at all of its 401 Taxpayer Assistance Centers. As 
of May 26, 2007, accuracy of the services we provided in these walk-in 
sites was 85 percent for accounts assistance and 80 percent for tax law 
assistance. To better measure the accuracy of tax law and account 
assistance, the IRS recently started implementing Contact Recording. As 
you note in your report, we have deployed Contact Recording in 127 of 
the 401 walk-in sites and plan to fully deploy this systems to all walk-
in sites by 2009. 

In addition, the IRS successfully responded to late legislation by 
hiring seasonal employees to lessen the impact of anticipated demands 
of the TETR legislation. The IRS also conducted additional training for 
all employees to address legislative changes enacted after our regular 
fall 2006 Continuing Professional Education classes. 

Volunteer Assistance - During the 2007 filing season, approximately 
76,619 IRS supported volunteers in 11,922 locations provided assistance 
to traditionally underserved populations. These include individuals 
with low incomes, the elderly, the disabled, rural, Native American, 
and those with Limited-English proficiency. Through September 2007, 
over 2.6 million returns were filed through our Volunteer Income Tax 
Assistance and Tax Counseling for the Elderly sites, an increase of 
15.8 percent over the prior year. Of these, 84.6 percent were e-filed, 
a 2.4 percent increase over 2006. To increase awareness of these 
services, as well as taxpayer education on basic income tax return 
filing and payment requirements, the availability of the Earned Income 
Tax Credit, e-file, and other tax related issues, more than 410 million 
outreach contacts were made during 2007. These contacts include 
multiple messages on varied topics to targeted taxpayer segments 
through both media and non-media channels. In order to serve more 
taxpayers through these programs, we also expanded our partnerships 
with community-based coalitions to approximately 326 in 2007. These 
strategic partnerships leverage IRS resources and allow us to reach far 
more taxpayers through trusted local community sources. 

Responses to your specific recommendations are enclosed. I appreciate 
your observations on the successful filing season for 2007, and if you 
have any questions, please contact me or Floyd Williams, Director, 
Legislative Affairs, at (202) 622-3720. 

Sincerely, 

Signed by: 

Linda E. Stiff: 
Acting Commissioner of Internal Revenue: 

Enclosure: 

[End of letter] 

Enclosure: 

Recommendation for the Commissioner: 
Determine actions needed to require software vendors to include bar 
codes on printed individual income tax returns and the cost of those 
actions. 

Response: 
We agree with this recommendation. Senate Report 110-129 of the 
Financial Services and General Government Appropriations Bill of 2008 
requires the IRS to provide to Congress a report addressing 2-D Bar 
Coding as stated, "Accordingly, the Committee directs the IRS, in 
consultation with stakeholders, such as the National Taxpayer Advocate, 
to develop a detailed strategic plan to meet the 80 percent e-File 
goal. This plan should address alternate electronic filing strategies, 
including Telefile and 2-D Bar Coding and methods of e-filing directly 
with the IRS for free." 

The report to Congress will include the information requested in your 
recommendation and specifically address: 

* The impact on commercial software providers to include bar codes on 
paper returns. 

* The IRS cost for processing bar coded returns. 

* Cost-benefit analysis of capturing all tax return information. 

* "Break-even" point paper processing versus electronic filing. 

Recommendation for the Commissioner: 
Determine the benefits, in terms of processing costs and improved 
enforcement, of having all return information available electronically. 

Response: 
We agree with this recommendation. Our planned actions in response to 
the first recommendation above will also address this recommendation. 

Recommendation for the Commissioner: 
Determine how much electronic filing would have to increase, either 
through electronic filing mandates or bar coding, for the benefits of 
transcribing all remaining paper returns to exceed the costs. 

Response:
We agree with this recommendation. Our planned actions in response to 
the first recommendation above will also address this recommendation. 

Recommendation for the Commissioner: 
Develop estimates of the effectiveness of IRS's volunteer program at 
targeting underserved populations. 

Response:
We agree with the recommendation. Our Stakeholder Partnerships, 
Education and Communication (SPEC) organization is currently working to 
develop appropriate measures to determine the success of targeted 
activities in specific underserved markets. Our territories throughout 
the country have targeted their local underserved markets (including 
low-income, disabled, rural, elderly, and Limited-English Proficient) 
since the October 2000 standup of the organization. The type and extent 
of activities vary, depending upon the local population, identified 
partners, partner needs and that of their customers, and the amount of 
available SPEC resources. The SPEC organization has recently taken 
steps to bring additional focus to these efforts by developing national 
initiatives to address these markets. National teams comprised of 
headquarters and field managers and employees are assessing current 
activities, identifying gaps, and developing action plans for 
nationwide direction. 

Recommendation for the Commissioner:
Determine the feasibility of using contact recording as a method of 
monitoring and improving the quality of return preparation assistance 
at IRS's walk-in sites. 

Response:
We agree with this recommendation. The IRS will determine the 
feasibility of testing the use of contact recording as a tool for 
monitoring the quality of return preparation assistance at walk-in 
sites. We will assess several methodologies using a Data Collection 
Instrument to monitor accuracy of return preparation. This is a new 
area of review with additional contingencies not experienced in 
accounts and tax law contacts. At the end of testing, we plan to 
recommend whether or not to adopt Centralized Quality Review Systems as 
a new review process. 

(450560)

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Highlights of [63]GAO-08-38 , a report to congressional requesters

November 2007

TAX ADMINISTRATION

2007 Filing Season Continues Trend of Improvement, but Opportunities to
Reduce Costs and Increase Tax Compliance Should be Evaluated

In 2007, the Internal Revenue Service (IRS) will spend over $3 billion to
process returns and provide taxpayer service. Effective service can reduce
taxpayers' burden of complying with tax laws and, many tax experts
believe, may improve compliance. GAO was asked to assess IRS's performance
relative to 2007 goals and prior years' performance including identifying
actions that might generate efficiencies and increase compliance. GAO
analyzed IRS performance data, reviewed IRS operations at various
locations, and interviewed IRS and paid preparer representatives.

[64]What GAO Recommends

GAO recommends that IRS determine the actions needed to require for
software vendors to include bar codes on printed returns, the benefits of
having all return information available electronically, and how much
electronic filing would have to increase for the benefits of transcribing
all paper returns to exceed the costs. GAO also recommends that IRS
develop estimates of the effectiveness of its volunteer program, and
determine the feasibility of using contact recording to monitor return
assistance quality at walk-in sites.

In response, the Acting IRS Commissioner agreed with our recommendations
and outlined the actions that IRS would take.

IRS improved most filing season services during 2007, continuing a
longer-term trend. Tax return processing exceeded last year's performance
by most measures. Electronic filing grew at a faster rate than IRS
anticipated and continued to generate savings. Access to IRS telephone
assistors was comparable to last year, and the accuracy of responses to
questions remained at about 90 percent. The performance of IRS's Web site
improved in several measures, such as customer satisfaction. Continuing
past trends, more taxpayers used volunteer sites, which are less costly
than IRS's walk-in sites.

Despite these improvements, IRS could reduce the number of paper tax
returns processed and also transcribe all lines from the residual paper
returns, making that data more available for enforcement. Two options for
reducing paper processing are electronic filing mandates, previously
suggested by GAO, and bar coding, which could be required for paper
returns prepared on computers and reduces processing costs. Currently,
because of the cost, IRS does not transcribe all lines from paper returns.
Further, IRS policy is to post the same lines from electronic and paper
returns to its enforcement databases. As a result, IRS does not use all
tax return information in its automated compliance checking programs.
However, IRS does not know the actions needed to require software vendors
to include bar codes on printed tax returns; the benefits, in terms of
processing savings and improved enforcement, of having all return data
available electronically; or how much electronic filing would have to
increase, either through mandates or bar coding, for the benefits of
transcribing all residual paper returns to exceed the costs.

Despite more reliance on its volunteer program, IRS has not evaluated its
effectiveness at reaching underserved taxpayers. Further, IRS may be
missing an opportunity to assess the quality of return preparation
assistance at its walk-in sites through contact recording, a system IRS
uses to record and assess the quality of other interactions between its
employees and taxpayers.

IRS's 2007 Filing Season Activities

References

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