IRS' 2000 Tax Filing Season: IRS Measures Show Tax Processing Systems
Performed Slightly Better Than in 1999 (Letter Report, 06/16/2000,
GAO/GGD-00-146).

Pursuant to a congressional request, GAO reviewed the performance of the
information systems that the Internal Revenue Service (IRS) uses to
process tax returns for individual taxpayers, focusing on: (1) IRS' tax
processing systems performance in the 2000 filing season as reported by
IRS compared to the 1999 filing season; and (2) whether IRS had taken
actions to address those problems affecting individual taxpayers.

GAO noted that: (1) according to IRS performance data and comments from
IRS officials and representatives of large tax practitioners, IRS' tax
processing systems performed slightly better in the 2000 filing season
than in the 1999 filing season; (2) for example, as of mid-April 2000,
IRS reported that it had experienced fewer work stoppages caused by
critical system-related problems and had fewer such problems that
remained unresolved for over 24 hours; (3) also, IRS reported that it
processed paper returns faster than in the 1999 filing season; (4) while
IRS' data indicate that tax processing systems performed slightly better
than last filing season, IRS reported that as of May 2, 2000, it had
experienced four minor system-related problems that affected relatively
small numbers of individual taxpayers; (5) for example, IRS sent some
refunds to the wrong individuals; and (6) according to IRS, it had: (a)
corrected all the system-related problems; (b) already taken or was
taking action to mitigate their effects on taxpayers; and (c) notified
individuals affected by two of the four problems; and (7) for the other
two problems that resulted in IRS sending funds to the wrong individual,
GAO was concerned that IRS did not notify them.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-00-146
     TITLE:  IRS' 2000 Tax Filing Season: IRS Measures Show Tax
	     Processing Systems Performed Slightly Better Than in 1999
      DATE:  06/16/2000
   SUBJECT:  Tax administration systems
	     Tax returns
	     Comparative analysis
	     Systems conversions
	     Performance measures
	     Taxpayers
IDENTIFIER:  IRS Corporate Files On-Line Project
	     IRS Integrated Data Retrieval System

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GAO/GGD-00-146

United States General Accounting Office
GAO

Report to the Chairman, Subcommittee on

Oversight, Committee on Ways and Means, House of

Representatives

June 2000

GAO/GGD-00-146

IRS' 2000 TAX FILING SEASON
IRS Measures Show Tax Processing Systems

Performed Slightly Better Than in 1999

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B-284658

Page 11GAO/GGD-00-146 Tax Processing Systems in th
e 2000 Filing Season
B-284658

June 16, 2000

The Honorable Amo Houghton
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Mr. Chairman:

This filing season, the Internal Revenue Service
(IRS) estimated its information systems would
process about 127 million individual income tax
returns and issue about 95 million refunds to
individual taxpayers. The performance of the
information systems that IRS uses for processing
tax returns and issuing refunds was of particular
interest this year because of the massive changes
that IRS made to help ensure that its systems were
Year 2000 compliant. Completing these changes
involved correcting millions of lines of
application software and upgrading or replacing
thousands of computer hardware and software
products. Although it performed extensive testing
of these changes, IRS anticipated that unexpected
system-related problems might occur during the
2000 filing season that could affect service to
taxpayers.

This report discusses one of several aspects of
the 2000 filing season that you requested we
review, specifically, the performance of the
information systems that IRS uses to process tax
returns for individual taxpayers.1 The objective
of this report is to compare IRS' tax processing
systems performance in the 2000 filing season as
reported by IRS to that of the 1999 filing season.2
To the extent that IRS reported problems affecting
individual taxpayers, we identified whether IRS
had taken actions to address those problems.

Results in Brief
According to IRS performance data and comments
from IRS officials and representatives of large
tax practitioners, IRS' tax processing systems
performed slightly better in the 2000 filing
season than in the 1999 filing season.3 For
example, as of mid-April 2000, IRS reported that
it had experienced fewer work stoppages caused by
critical system-related problems and had fewer
such problems that remained unresolved for over 24
hours. Also, IRS reported that it processed paper
returns faster than in the 1999 filing season.

While IRS' data indicate that tax processing
systems performed slightly better than last filing
season, IRS reported that as of May 2, 2000, it
had experienced four minor system-related problems
that affected relatively small numbers of
individual taxpayers (see pp. 6-9); for example,
IRS sent some refunds to the wrong individuals.
According to IRS, it had (1) corrected all the
system-related problems, (2) already taken or was
taking action to mitigate their effects on
taxpayers, and (3) notified individuals affected
by two of the four problems. For the other two
problems that resulted in IRS sending refunds to
the wrong individuals, we were concerned that IRS
did not notify them.

In commenting on a draft of this report, the
Commissioner of Internal Revenue generally agreed
with the findings and provided additional
information that either mitigated our concern or
made it apparent that notifying affected
individuals now would not be meaningful. Thus, we
are not making any recommendations. We plan to
follow up on the reasons IRS officials provided
for why earlier notification was not possible and
whether IRS' planned business and systems
modernization efforts may help in this regard.

Background
Different IRS organizational units have various
methods for monitoring the performance of IRS' tax
processing systems during the filing season. The
Information Systems (IS) Division, which is
responsible for managing and maintaining IRS'
information systems, uses "corporate systems"
performance measures and a problem-reporting
system. IRS' 10 service centers use various
performance measures to monitor and track their
tax return workload.4 Also, IRS tracks performance
vis-a-vis certain management-level goals that
focus on tax return processing.

The IS Division uses three corporate systems
performance measures that relate to tax return
processing. Two of the measures focus on the
percent of time that two critical information
systems, the Integrated Data Retrieval System
(IDRS) and Corporate Files on Line (CFOL), are
available to frontline employees. Both of these
systems provide access to certain taxpayer account
information that frontline employees use for
correcting errors in taxpayers' returns. The third
corporate systems performance measure tracks the
timeliness of IRS' two primary computing centers
in processing weekly updates of taxpayer accounts
with the latest tax return information.

In addition to the corporate systems performance
measures, the IS Division uses a problem-reporting
system across IRS to identify, correct, and track
system-related problems. IRS designates a problem
as critical and assigns it a priority 1 (hereafter
referred to as critical) if it causes a work
stoppage that results in a severe disruption to
normal processing, thus requiring National Office
attention and immediate correction. According to
an IRS official, the agency considers the
resolution of a critical problem to be overdue if
the problem remains unresolved for over 24 hours.
All problems are to be continually monitored, and
overdue problems are to receive increased scrutiny
by IRS officials. IRS uses the same process and
assigns a lesser priority to other problems,
including those not requiring immediate responses.5

In addition to the IS measures, each of IRS' 10
service centers tracks various performance
measures related to tax return workload. These
measures capture the performance of IRS' tax
processing systems as well as employee
productivity. An example of this type of measure
is cycle time (i.e., the number of days it takes
to process a paper return).

Finally, IRS uses data from all of the service
centers to track performance on certain management-
level goals, such as refund timeliness. These
goals are included in IRS' performance plans for
purposes of reporting on the Government
Performance and Results Act and, thus, are
intended to reflect IRS' performance on certain
aspects of its mission.

IRS Measures Show Systems Performed Slightly
Better Than in 1999, With a Few Minor Problems
Affecting Taxpayers
IRS' tax processing systems performed slightly
better than in 1999, according to various sources.
Every filing season, IRS anticipates that some
system-related problems might occur. At the time
we completed our work, IRS reported that for the
2000 filing season, it had experienced four
problems with its tax processing systems that it
considered minor and that affected small numbers
of individual taxpayers.

Measures Show Tax Processing Systems Performed
Slightly Better Than in 1999
Various performance data, IRS officials, and
representatives of large tax practitioners
indicated that the tax processing systems
performed slightly better in the 2000 filing
season than in 1999. According to IS Division
corporate systems performance measures, shown in
table 1, in both 1999 and 2000, IRS reported that
frontline employees had IDRS and CFOL available to
them virtually 100 percent of the time, with about
a half a percentage point improvement in 2000. As
we said earlier, IRS frontline employees use these
two systems to help resolve errors in taxpayers'
returns. Also, as shown in table 1, computing
centers exceeded their timeliness goal for fiscal
year 2000.

Table 1: Corporate Systems Performance Measures
Measure: Percent     Fiscal year      Fiscal year  
of time                1999            2000
                   Goa   Accomplish   Goa    Accomplish 
                   l       menta   l       mentb
CFOL was           99 %       99.3 % 99 %       99.8 %
available to
frontline
employees
IDRS was           99         99.1   99         99.5 
available to
frontline
employees
Computing center   97         98.7   97         98.9 
schedules were
met for weekly
updates to
taxpayer
accounts
aData as of March 31,1999.
bData as of March 31, 2000.
Source: IRS data.

Another measure of system performance is the
number of critical system-related problems
reported during the filing season. The IS Division
reported that as of April 22, 2000, the number of
critical system-related problems had declined by
23 percent-from 757 to 584-from the 1999 to the
2000 filing season. Also, the number of critical
problems whose resolution was considered to be
overdue was consistently below the number in the
1999 filing season-anywhere from 38 to 77 percent
lower each week through April 22, 2000.

We recognize that the number of critical and
overdue problems has some limitations as a measure
of performance because they vary in terms of their
complexity. But under IRS' definition of critical
problems-those that cause a work stoppage and
require National Office attention-we believe
including the number as a measure of system
performance is appropriate.

Indirect measures of system performance, such as
the number of days required to process tax returns
and refund timeliness, also showed some
improvement. As shown in table 2, as of April 21,
2000, IRS had processed all types of paper form
1040s faster in the 2000 filing season than in the
corresponding period in 1999.6

Table 2: Number of Days Required to Process
Various Types of Form 1040 Paper Returns
Tax return                        Days      Percent 
                                             age
                                          change
                               1999a 2000b            
Form 1040 (manual entry)          7    6       -14 %
Form 1040A (manual entry)         7    5       -29 
Form 1040 EZ (electronically      5    4       -20 
scanned)
Form 1040 EZ (manual entry)       8    5       -38 
aData as of April 16, 1999.
bData as of April 21, 2000.
Source: GAO analysis of IRS data.

Finally, as shown in table 3, IRS exceeded the
management-level goals for refund timeliness for
fiscal year 2000 for returns filed either on paper
or electronically, and exceeded its fiscal year
1999 accomplishments for returns filed on paper.

Table 3: Refund Timeliness Performance Measures
Measure:    Fiscal year 1999      Fiscal year 2000
Timeline
ss of
refunds
fileda
          Goal       Accomplishm   Goal      Accomplish
                  entb                  mentc
On paper  Baseline   Processed     Process   Processed
        year for   84.7% of     85% of    95.5% of
        establish  refunds in   refunds   refunds in
        ing a      40 days or   in 40     40 days or
        goal       less         days or   less
                              less
Electron  Process    Processed     Process   Processed
ically   98% of     100% of      99% of    99.9% of
        refunds    refunds in   refunds   refunds in
        in 21      21 days or   in 21     21 days or
        days or    less         days or   less
        less                   less
aFor individual income tax returns.
bData as of March 13, 1999.
cData as of March 11, 2000, which were the most
current data at the time we prepared this report.
Source: Tax Administration: IRS' 1999 Tax Filing
Season (GAO/GGD-00-37) and IRS data.

IRS officials and representatives of tax
practitioners confirmed that tax systems performed
slightly better in the 2000 filing season than in
1999. The Commissioner of Internal Revenue
recently noted that the first 3 months of the 2000
filing season were smooth and "almost error free."
Cognizant National Office officials and Kansas
City and Atlanta Service Center officials said
that few system-related problems affected
taxpayers in the 2000 filing season, and overall,
tax processing system performance was better than
in 1999. Likewise, in March 2000, representatives
from tax practitioners said that IRS' tax
processing systems, including those used for
electronic filing, appeared to be performing
without significant disruptions.

The Commissioner attributed the success of the
2000 filing season to the thorough Year 2000
planning and preparation that was done over the
last 3 years. For example, the Commissioner
established and participated in an executive
steering committee between November 1997 and
January 2000 that was, in part, to identify and
mitigate potential risks for the filing season and
IRS' Year 2000 effort.7 Also, to accommodate the
need to conduct extensive testing of the Year 2000
system changes in advance of the 2000 filing
season, IRS compressed its normal schedules to
implement and test the Year 2000 system changes by
3 months. In December 1999, IRS completed that
testing and reported having identified and
corrected 57 critical problems before the 2000
filing season began. According to IRS officials,
if these problems had not been corrected,
significant disruptions might have occurred during
the 2000 filing season.

IRS Reported Four Minor Problems That Affected
Small Numbers of Taxpayers
Given its tremendous workload, IRS anticipates it
will have some system-related problems every
filing season-some that directly affect taxpayers,
others that do not. As of May 2, 2000, IRS
reported it had experienced four problems that it
considered minor and that affected small numbers
of taxpayers. IRS officials said they had (1)
corrected all four system-related problems, (2)
already taken or were taking action to mitigate
the effects on taxpayers, and (3) notified
individuals affected by two of the four problems.
Because the other two problems resulted in refunds
going to the wrong individuals, we were concerned
that IRS officials had not notified affected
individuals.  In commenting on a draft of this
report, the Commissioner provided information that
mitigated our concern or made it apparent that
notifying them now would not be meaningful.

The first minor problem involved IRS issuing 440
balance-due notices with erroneous due dates. The
notices were sent to taxpayers who owed more than
$100,000 and accounted for less than 1 percent of
the balance-due notices issued that week. IRS
reported that it had corrected the problem,
contacted all affected taxpayers, and provided the
correct payment dates.

The second problem involved IRS' electronic filing
system, which improperly rejected about 40,000
individual returns that claimed a child care
credit or reported dependent care benefits from an
employer. IRS reported that the problem began in
mid-January and was corrected by mid-February. IRS
posted a notification to taxpayers and
practitioners about this problem on its Web site.
According to a representative of the largest tax
practitioner, most of its clients simply
resubmitted their return electronically or filed a
paper return.

The third problem related to taxpayers that had
designated a power of attorney to allow a third-
party representative to handle their tax matters.
One of IRS' information systems mistakenly removed
a "flag" on certain taxpayer accounts that had
designated a power of attorney. As a result, IRS
officials said that in January and February, 322
refunds were mailed directly to the taxpayer
instead of the third-party representative.  Also,
nearly 34,000 notices relating primarily to
current tax year matters were delayed in being
sent to third-party representatives, and an
undetermined number of notices relating primarily
to past years' tax matters were not sent to the
third-party representatives. As we reported in
March, IRS said it had corrected this problem.8

With respect to the refunds that were mistakenly
sent to the taxpayer, the Office of Taxpayer
Advocate9 was aware of this problem in February
and had requested that IRS contact the third-party
representatives.  At the time, IRS estimated that
only 11 refunds were affected by this problem, but
needed to (1) confirm the actual number of
taxpayer accounts involved, (2) identify which
taxpayer accounts were involved, and (3) identify
the cognizant third-party representatives. These
actions took about 2 months. In commenting on a
draft of this report, the Commissioner noted that
IRS decided not to notify the third-party
representatives because the (1) number of taxpayer
accounts involved increased to 322, thus
increasing the staff costs associated with
notification, and (2) 2-month time lag raised
questions about the meaningfulness of such
notification.

In his comments, the Commissioner provided other
information that mitigated our concerns about the
lack of notification. First, the Commissioner said
that in most instances, the taxpayer was required
to endorse the refund check although it was to be
sent to the third-party representative. Second,
the Commissioner said that upon further research,
IRS determined that these were either small
business or self-employed taxpayers, thus allaying
our concern  that these were individual taxpayers
who were unable to handle their tax matters
because of competency issues. Finally, the
Commissioner also said that the Office of the
Taxpayer Advocate had been told of the decision
not to notify the affected taxpayers.

Regarding the nearly 34,000 notices, IRS officials
said they mailed copies to the third-party
representatives anywhere from several days to
several weeks later than copies sent directly to
the taxpayer. According to IRS officials, in the
event the notices related to unpaid tax
liabilities and those tax liabilities were not
paid on time, certain penalties might need to be
abated. In commenting on a draft of this report,
the Commissioner said that IRS provided the
service centers with instructions for doing so.
For notices that primarily related to past years'
tax matters, IRS planned to rely on subsequent
mailings to inform the third-party
representatives.

IRS identified a fourth problem in March, which
related to the direct deposit of refunds, and
corrected it in April 2000. As a result of this
problem, 3,463 individual taxpayers did not
receive refunds via direct deposit to which they
were entitled, and IRS misdirected these refunds
to 3,180 other taxpayer accounts.10 According to
IRS, about $4.3 million in refunds were
erroneously issued. This represents a small
fraction of IRS' direct deposit activity. As of
May 12, 2000, IRS reported that it had made almost
29 million direct deposits to individual taxpayers
totaling almost $60 billion.

As with the problem related to the third-party
representatives, IRS needed time to identify which
taxpayers were affected. For those taxpayers that
mistakenly received a refund, the service centers
were taking steps to retrieve the refunds made in
error, and as of April 28, 2000, IRS officials
reported they had recovered $1.3 million. For
taxpayers who did not receive refunds to which
they were entitled, IRS officials said the service
centers were taking steps to mail refunds as soon
as possible, and as of April 28, 2000, had issued
refunds to 2,784 of the 3,463-or about 80
percent-of those taxpayers. However, IRS officials
said they had not notified those taxpayers that
they changed the method of payment from a direct
deposit to a check sent in the mail. According to
IRS officials, they could not easily inform
taxpayers about this change, in part because IRS
could not quickly generate a notice or letter to
address this problem. Further, they said they
thought it would serve taxpayers more effectively
to have staff focus on issuing refunds rather than
on sending letters or calling them.

Conclusions
Although, according to various sources, IRS' tax
processing systems performed slightly better than
in 1999, we were concerned that IRS did not notify
individuals about the two problems that resulted
in, among other things, IRS sending refunds to the
wrong individuals. In commenting on a draft of
this report, the Commissioner of Internal Revenue
provided additional information about the
circumstances that either mitigated our concern or
made it apparent that notifying them now would not
be meaningful. Thus, we are not making any
recommendations. We plan to follow up on the
reasons IRS officials provided for why earlier
notification was not possible and whether IRS'
planned business and systems modernization efforts
may help in this regard.

Scope and Methodology
To compare the performance of IRS' tax processing
systems used in the 2000 filing season with that
of 1999 for processing individual income tax
returns, we

ï¿½    attended weekly meetings at which all
reported critical system-related performance
problems were discussed, and obtained and analyzed
the relevant data discussed during those meetings;
ï¿½    reviewed IRS' Web page, which posts
information notifying taxpayers of tax return
processing problems;
ï¿½    interviewed cognizant IRS National Office and
field officials to discuss (1) system performance
and any problems reported by IRS this year, (2)
variances in system performance between the 1999
and 2000 filing seasons, and (3) reasons for the
problems and variances;
ï¿½    interviewed a representative of the largest
tax practitioner to solicit his views regarding
the performance of IRS' electronic filing system
and how that performance compared with 1999
performance;
ï¿½    reviewed the March 28, 2000, congressional
testimonies of other large tax practitioners; and
ï¿½    obtained and analyzed certain service center
performance measurement data for the 1999 and 2000
filing seasons.

To the extent that IRS reported problems affecting
individual taxpayers, we discussed the types of
actions IRS took to address those problems with
National Office and field officials.

We relied on IRS' performance measurement data in
comparing system performance in the 1999 and 2000
filing season. For IS performance measures, we
obtained data on corporate systems measures and
did not review performance measures for each
individual tax processing system. We also reviewed
only those management-level goals that would be
directly impacted by systems performance. Where
warranted, we discussed reported system
performance problems with users at the Kansas City
and Atlanta Service Centers.

Although the due date for filing individual tax
returns for the 2000 filing season was April 17,
2000, IRS continued to process tax returns for
several weeks afterward. Therefore, we continued
to monitor the performance and problems of IRS'
tax processing systems during this period. We
conducted our work at IRS' National Office and the
Kansas City and Atlanta Service Centers between
January and May 2000. We conducted our work in
accordance with generally accepted government
auditing standards.

Agency Comments and Our Evaluation
On June 6, 2000, we met with IRS officials to
obtain their comments on a draft of this report.
The Commissioner of Internal Revenue subsequently
provided written comments on June 12, 2000. The
Commissioner generally agreed with our report and
provided technical clarifications that we have
incorporated where appropriate. (See the appendix
for a copy of the letter).

We are sending copies of this report to Senator
William V. Roth, Jr., Chairman, and Senator Daniel
P. Moynihan, Ranking Minority Member, Senate
Committee on Finance; Representative Bill Archer,
Chairman, House Committee on Ways and Means;
Representative Charles B. Rangel, Ranking Minority
Member, House Committee on Ways and Means; and
Representative William J. Coyne, Ranking Minority
Member, Subcommittee on Oversight, House Committee
on Ways and Means. We are also sending copies to
the Honorable Lawrence H. Summers, Secretary of
the Treasury; the Honorable Charles O. Rossotti,
Commissioner of Internal Revenue; the Honorable
Jacob J. Lew, Director, Office of Management and
Budget; and other interested parties. Copies of
this report will be made available to others upon
request.

If you have any questions regarding this report,
please contact me or Sherrie L. Russ at (202) 512-
9110. Key contributors to this assignment were
Joanna Stamatiades, Doris Hynes, Linda Standau,
and Bradley Terry.

Sincerely yours,

James R. White
Director, Tax Policy and
 Administration Issues
_______________________________
1You also requested that we review IRS' efforts to
(1) to improve the level of toll-free telephone
service, (2) provide walk-in assistance, and (3)
increase the use of electronic filing. Later in
the year, we plan to issue reports on these areas.
2Tax processing systems are the information
systems IRS uses to input, verify, correct, and
record taxpayer information.
3In the 1999 filing season, IRS reported that tax
processing systems performed without any major
disruptions.
4IRS' 10 service centers are responsible for
processing paper and electronic submissions,
correcting errors, and forwarding the data through
a data processing and telecommunications
infrastructure to two computing centers. The
computing centers are responsible for maintaining
the Master Files-IRS' primary taxpayer account
databases.
5Priority 2 problems do not involve a work
stoppage but require support from IRS' National
Office. Priorities 3 to 5 are assigned to problems
that can be corrected by the field offices.
6According to IRS officials, they do not track
processing times for returns filed electronically
because those returns are processed so quickly
that the measurement would not be considered
meaningful.
7For the last several years, IRS has undertaken
efforts to coordinate and monitor filing season
activities, particularly to assess filing season
readiness at the 10 service centers. However, past
efforts did not include the Commissioner and other
high-level executives who routinely participated
in the Year 2000 Executive Steering Committee.
8Tax Administration: IRS' 2000 Tax Filing Season
and Fiscal Year 2001 Budget Request (GAO/T-
GGD/AIMD-00-133, Mar. 28, 2000).
9The Office of the Taxpayer Advocate provides an
independent advocate within IRS that, among other
things, is to resolve taxpayers' problems through
prompt identification and settlement.
10IRS told us that the number of taxpayer accounts
that received refunds in error is less than the
number of taxpayers who should have received
refunds because some taxpayer accounts received as
many as five erroneous direct deposits and some
taxpayers used joint accounts. For these reasons,
IRS provided the number of taxpayer accounts but
not the exact number of taxpayers that received
refunds that were not entitled to them.

Appendix
Comments From the Internal Revenue Service
Page 14GAO/GGD-00-146 Tax Processing Systems in th
e 2000 Filing Season
Now on p. 7.
Now on p. 4.

Now on p. 7.
Now on p. 8.

*** End of Document ***