Tax Administration: Continuing Problems Affect Otherwise Successful 1994
Filing Season (Letter Report, 10/07/94, GAO/GGD-95-5).

The 1994 tax filing season was successful in many respects. The number
of returns filed increased after an unexpected decline in 1993, and more
taxpayers used alternatives to the traditional paper filing method. Tax
refunds were generally processed accurately and issued promptly, and the
Internal Revenue Service (IRS) improved the accuracy of its return
processing, reducing the amount of rework. IRS computers generally
worked well with minimal downtime. Taxpayers looking for tax forms and
publications at IRS walk-in sites could reasonably expect to find them,
and taxpayers calling IRS' toll-free telephone lines with tax law
questions could generally expect to get accurate answers. However, there
were some significant problems. The number of IRS-detected fraudulent
refund claims continued the steady increase that has troubled the agency
for the past several years. The ability of taxpayers to reach IRS by
telephone has been a problem for several years and has degraded even
further in 1994. The earned income credit was the source of many errors
by taxpayers and tax practitioners preparing returns.

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

 REPORTNUM:  GGD-95-5
     TITLE:  Tax Administration: Continuing Problems Affect Otherwise 
             Successful 1994 Filing Season
      DATE:  10/07/94
   SUBJECT:  Tax administration systems
             Tax returns
             Reference service operations
             Information dissemination operations
             Tax credit
             Tax violations
             Telephone communications operations
             Tax refunds
             Fraud
             Information processing operations
IDENTIFIER:  Earned Income Tax Credit
             IRS Audit Information Management System
             IRS TeleFile Program
             IRS Reduce Unnecessary Filings Program
             IRS Automated Underreporter System
             IRS Computer Assisted Pipeline Review
             IRS 1040PC Program
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Oversight, Committee on Ways
and Means, House of Representatives

October 1994

TAX ADMINISTRATION - CONTINUING
PROBLEMS AFFECT OTHERWISE
SUCCESSFUL 1994 FILING SEASON

GAO/GGD-95-5

1994 Filing Season


Abbreviations
=============================================================== ABBREV

  CAPR - Computer Assisted Pipeline Review
  EIC - Earned Income Credit
  IRS - Internal Revenue Service

Letter
=============================================================== LETTER


B-258301

October 7, 1994

The Honorable J.J.  Pickle
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we assess the Internal
Revenue Service's (IRS) performance during the 1994 tax filing
season.  Specifically, we discuss the processing of individual income
tax returns and related refunds and the accessibility that taxpayers
have to IRS. 

To assess IRS' progress in managing the annual tax filing season and
providing taxpayers with service and information, we present trend
data on various filing season activities and inventories in appendix
I. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The 1994 filing season was successful in many respects.  The number
of returns filed increased after an unexpected decline in 1993, and
more taxpayers used alternatives to the traditional paper filing
method.  According to IRS data and our review at 1 of IRS' 10 service
centers, tax refunds were generally processed accurately and issued
in a timely manner, and IRS improved the accuracy of its returns
processing, thus reducing the amount of rework.  IRS' computers
generally worked well with minimal downtime.  On the basis of tests
done by us and IRS, taxpayers looking for tax forms and publications
at IRS walk-in sites could reasonably expect to find them, and
taxpayers calling IRS' toll-free telephone assistance with tax law
questions could generally expect to get accurate answers. 

However, there were some significant problems. 

  The number of IRS-detected fraudulent refund claims continued the
     steady increase that has troubled IRS for the past several
     years.  Through the first 6 months of 1994, IRS had identified
     twice as many fraudulent claims as it had during the same period
     in 1993.  What remains unclear is (1) how much of that growth is
     due to increased fraudulent activity versus improved IRS
     monitoring and (2) how much additional fraud might be going
     undetected. 

  The ability of taxpayers to reach IRS by telephone has been a
     problem for several years and has degraded even further in 1994. 
     Using IRS data, we determined that (1) only about 20 percent of
     the calls to IRS' toll-free telephone assistance and 50 percent
     of the calls to IRS' forms distribution centers were being
     answered and (2) only 13 percent of the calls to IRS' TeleFile
     system were getting through during the peak period. 

  The Earned Income Credit (EIC) was the source of many errors by
     taxpayers and tax practitioners in preparing returns.  Those
     errors, along with errors by IRS staff in following IRS
     procedures for handling EIC claims, increased IRS' error
     resolution workload and delayed taxpayers' receipt of benefits. 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :2

Our objective was to assess IRS' performance during the 1994 filing
season.  Specifically, we focused on IRS' ability to (1) process
income tax returns and refunds accurately and efficiently and (2)
provide taxpayers access to forms, information, and electronic filing
methods. 

To achieve our objective, we

  validated the results of 1 service center's test of the accuracy
     and timeliness of refunds by reviewing 853 randomly selected
     refunds;

  analyzed filing season-related data from IRS' Management
     Information System for Top Level Executives and IRS data on
     processing errors, including those involving the EIC;

  reviewed IRS reports on refund fraud;

  reviewed computer system availability reports and attended weekly
     operational meetings held by IRS' National Office Command
     Center;

  assessed the availability of tax materials by visiting 10 walk-in
     sites;

  tested taxpayers' access to ordering forms and publications from
     IRS' 3 tax material distribution centers by placing phone calls
     to those centers;

  analyzed IRS' toll-free telephone system accessibility data,
     telephone activity data for area distribution centers, and
     telephone accessibility reports for the TeleFile system;

  compiled trend data for various indicators of IRS' filing season
     performance; and

  interviewed IRS National Office officials and IRS officials in the
     Atlanta; Cincinnati; Fresno, CA; and Kansas City, MO, Service
     Centers responsible for the various activities we assessed. 

We did our work from January through August 1994 in accordance with
generally accepted government auditing standards.  With the exception
of the refund accuracy rate and refund timeliness measure, we did not
test and verify statistical data provided by IRS.  We discussed our
findings and conclusions in an exit conference attended by cognizant
IRS officials, including the National Director for Submission
Processing, the Assistant Commissioner for Taxpayer Services, the
Director for Taxpayer Service Design and Review, and the Chief of the
Publishing Distribution Section.  Their comments are presented and
evaluated on page 15.  Other changes resulting from their comments
were made in the body of the report as appropriate. 


   IRS' SUCCESSFUL PROCESSING OF
   RETURNS IN 1994 MARRED BY
   CONTINUING PROBLEMS WITH REFUND
   FRAUD AND THE EIC
------------------------------------------------------------ Letter :3

There were many positive aspects of the 1994 filing season.  After an
unexpected drop in individual income tax return filings in 1993, the
number filed in 1994 went up, although not as much as IRS had
originally anticipated; and more of those returns were filed through
alternative methods like electronic filing.  IRS' computer systems
generally performed well with intermittent problems causing only
minor delays.  IRS also exceeded its accuracy and timeliness goals
for processing refunds and its accuracy goal for processing returns
and took positive steps to improve its processing of tax receipts. 
However, there were some problems.  The EIC continued to be a leading
source of errors by taxpayers and tax practitioners in preparing
returns, thus contributing to IRS' error resolution workload; and the
number of fraudulent refund claims identified by IRS continued to
grow at a troubling pace. 


      TAXPAYERS FILED MORE RETURNS
      IN 1994
---------------------------------------------------------- Letter :3.1

As of September 9, 1994, IRS had received 113.4 million individual
income tax returns, compared to 112.7 million for the same period in
1993. 

In planning for the 1994 filing season, IRS had expected to receive
117.5 million individual returns--a projection that was based on
historical growth rates.  As shown in figure I.1 in appendix I, in
the several years preceding 1993, the number of individual income tax
returns filed increased consistently from year to year.  However,
there was an unexpected reduction in the number of returns filed in
1993. 

Because of the drop in the number of filers, IRS' Research Division
analyzed the shortfall in 1993 individual income tax returns.  IRS
determined that the major causes of this shortfall were (1) the IRS
Reduce Unnecessary Filings program,\1 (2) a drop in interest rates
that reduced the income levels of certain taxpayers below filing
requirement thresholds, and (3) the 1992 change in withholding rates
that apparently left some individuals with an unanticipated balance
due and who then did not file a return. 

On the basis of its analysis of the 1993 filing season, which was not
completed until the spring of 1994--well into the 1994 filing season,
IRS revised its projection model and dropped the expected 1994
filings to 114.5 million from the original 117.5 million.  We did not
review or test the assumptions IRS used to revise its projection
model and, therefore, cannot comment on the reasonableness of the
adjustment.  As of September 9, however, the number of filings was
still 1.1 million short of IRS' revised expectations. 


--------------------
\1 The purpose of the Reduce Unnecessary Filings program is to
identify and contact taxpayers who filed a federal income tax return
the prior year even though they may not have been required to do so. 
IRS sends each taxpayer a notice, worksheet, and instructions for
taxpayers to use in determining whether they should file a federal
return.  In 1993, IRS sent 1 million notices that it determined
resulted in 744,000 fewer taxpayers filing returns.  In 1994, IRS
sent 1.4 million notices; IRS will not know how many fewer taxpayers
filed until later in 1994. 


      USE OF ALTERNATIVE FILING
      METHODS GENERALLY INCREASED
---------------------------------------------------------- Letter :3.2

Although the overall number of individual filers has not
significantly increased, taxpayer use of the various alternative
filing methods generally increased in 1994.  IRS offers three types
of filing alternatives to the traditional paper return:  electronic,
TeleFile, and 1040PC.  Electronic and TeleFile use increased in 1994;
1040PC use declined slightly. 

In 1994, 13.5 million individual income tax returns were filed
electronically--up from 12.3 million in 1993.  As shown in figure I.2
in appendix I, this continues the consistent growth in electronic
filing since it became available nationwide in 1990. 

Under TeleFile, certain taxpayers who are eligible to file a Form
1040EZ are allowed to file using a toll-free number on touch-tone
telephones.  In 1993, TeleFile was available to taxpayers in 1 state,
and about 149,000 taxpayers used the system.  IRS expanded the
availability of TeleFile to 7 states in 1994, and the number of users
grew to about 519,000.  In 1995, IRS plans to expand TeleFile to all
or parts of three more states and to double the number of telephone
lines.  IRS expects to further expand the system in 1996 and make it
available nationwide in 1997. 

Under the 1040PC method, a filer uses personal computer software that
produces tax returns in an answer-sheet format.  The 1040PC shows the
tax return line number and the data (dollar amount, name, etc.) on
that line.  Only lines on which the taxpayer has made an entry are
included on the 1040PC.  IRS received about 4.8 million 1040PC
returns in 1993, but only about 4.2 million in 1994.  IRS attributes
the decline to a delay by a major return preparer in submitting its
1040PC software for IRS approval.  The decline might also be
attributed to problems with the 1040PC that were discussed during a
September 1993 meeting of the Internal Revenue Commissioner's
Advisory Group.  As reported in the September 3, 1993, issue of the
Daily Tax Report, those problems involved taxpayers' inability to
interpret the 1040PC and use it as an aid in doing such things as (1)
preparing state tax returns and (2) completing financial aid forms
for children.  IRS officials told us that steps have been taken to
address these problems.  In the future, 1040PC software packages will
be required to provide the taxpayer with a legend explaining the
lines on the 1040PC or a printed copy of the full return. 


      COMPUTER SYSTEMS GENERALLY
      PERFORMED WELL
---------------------------------------------------------- Letter :3.3

IRS' computer systems generally performed well during the 1994 filing
season.  However, some systems problems occurred that had operational
impacts, such as downtime for IRS employees and short delays in
refunds for taxpayers. 

Systems problems caused the computer systems at various locations to
be unavailable to IRS personnel for generally short periods of time
(less than 12 hours).  According to IRS problem assessments, this
limited downtime usually had a minimal impact on IRS' overall
operations.  However, in 1 instance, a problem with the Automated
Underreporter System at 1 service center caused IRS to lay off 270
temporary employees for about 1 week.  IRS officials attributed this
event to systemic problems in the software provided by the vendor. 

IRS had some intermittent systems problems that affected taxpayers. 
For example, one problem caused tax returns that were electronically
filed at one service center on February 1, 1994, to not be processed
on time.  IRS estimated that the problem caused about a 1-week delay
in processing those refunds. 


      REFUND TIMELINESS AND
      ACCURACY GOALS MET
---------------------------------------------------------- Letter :3.4

Two of IRS' goals are to issue individual income tax refunds within
an average of 40 days and with at least a 98-percent accuracy rate. 
IRS reports show that each of the 10 service centers met the
timeliness goal, and the average issuance time for all 10 centers was
36 days.  Also according to IRS data, 8 of the 10 centers met or
exceeded the accuracy goal; the other 2 centers' accuracy rates were
within 1 percent of the goal.  The average accuracy rate for all
service centers was 98.6 percent. 

IRS measures refund accuracy by reviewing samples of
nonelectronically filed returns with a refund due to the taxpayer. 
It compares the taxpayer's name, address, and refund amount on the
tax return with the same information on IRS' master file, which is
used to generate the refund check.  By comparing this information,
IRS can determine if an error was made and who made the error.  IRS
uses the same sample to measure refund timeliness.  IRS computes the
number of days from the return's signature date to the date the
taxpayer would have received the refund, allowing 2 days after
issuance for the refund to reach the taxpayer. 

For the 1994 filing season, we examined the methodology IRS uses in
measuring refund accuracy and timeliness.  Using IRS criteria for
testing accuracy and timeliness, we replicated its test at one
service center using its four cluster samples.  We selected and
compared the results from a random sample of 853 refunds out of the
service center's 3,693 refunds used for its test. 

We agreed with 98.6 percent of the service center's results.  The
1.4-percent difference consisted of instances where service center
personnel overlooked errors that our review caught.  On the basis of
these results, we concluded that the test conducted at one service
center provides a valid measure of that service center's accuracy and
timeliness of refunds. 


      REVENUE PROCESSING
      PROCEDURES ENHANCED
---------------------------------------------------------- Letter :3.5

In an effort to improve check processing and deposit tax receipts
more timely, IRS (1) tested the use of lockboxes\2 and (2) required
each of the service centers to develop procedures for depositing
revenues.  Establishing lockboxes was not a new procedure for IRS. 
It has been using lockboxes for estimated tax payments since 1989. 


--------------------
\2 A lockbox is a postal rental box serviced by a commercial bank
where persons mail payments.  The bank processes the payments and
transfers the funds to a federal government account.  The payment and
payer information is then recorded on a computer tape and forwarded
to IRS where the tape is used to update taxpayers' accounts on IRS'
master file. 


         LOCKBOX TESTS
-------------------------------------------------------- Letter :3.5.1

To assess taxpayers' willingness to use different procedures for
mailing tax payments associated with their returns, IRS conducted
three lockbox tests during the 1994 filing season.  For each test,
IRS sent special Form 1040 packages to selected taxpayers.  These
packages included (1) mailing instructions that were different for
each of the three tests and (2) a payment voucher that could be
scanned by optical character recognition equipment. 

  One test package contained a return envelope with two different
     tear-off address labels--one label addressed to the lockbox was
     to be used for a return with a tax balance due, while the other
     label addressed to the service center was to be used for a
     return with a refund due to the taxpayer.  Taxpayers with
     balance-due returns were instructed to include the return,
     payment, and voucher in one envelope and to affix the label
     addressed to the lockbox.  The bank that serviced the lockbox
     separated the return from the payment, deposited the payment,
     recorded the payment information on a computer tape, and
     forwarded the return and the computer tape to IRS for
     processing. 

  Another test package used two envelopes--one addressed to the
     service center, the other addressed to the lockbox.  All
     taxpayers were instructed to send only the return in the
     envelope addressed to the service center.  However, taxpayers
     who owed a balance were to use the second envelope to send their
     payments and vouchers to the lockbox.  The bank processed the
     payment and voucher as described above. 

  The third test package also contained two envelopes.  This test was
     no different from the other two-envelope test, except that these
     envelopes were postage paid.  Thus, taxpayers incurred no
     expense by separating their returns from their payments and
     mailing them to the two addresses. 

On the basis of preliminary results of the three tests, IRS has
decided to continue testing the two-label and two-envelope methods
nationwide during the 1995 filing season.  IRS plans to initiate some
type of lockbox collection process nationwide in 1996. 


         SERVICE CENTER DEPOSITS
-------------------------------------------------------- Letter :3.5.2

One measure of service center efficiency is the speed with which they
deposit tax receipts.  In response to our past recommendations,\3 IRS
required each service center to provide a plan on how they would
expedite the identification and depositing of large dollar
remittances during the peak filing season.  Service centers were
required to give priority handling to mail in oversized envelopes
because IRS had determined that a high proportion of those envelopes
contained large tax payments.  However, because service centers were
not required to separately track the amounts extracted from oversized
envelopes, IRS could not determine the actual impact of this priority
handling. 

In another effort to expedite deposits, IRS also required that all
tax payments received with individual tax returns around the April
15th filing deadline be deposited by May 2, 1994.  Nine of the 10
service centers met the goal; the other center was 1-day late. 
Service centers processed and deposited more tax payment revenues
from individuals than in the previous year.  Between April 15 and May
2, 1994, service centers deposited $41.5 billion compared to $36.2
billion during the same time period in 1993. 


--------------------
\3 Tax Administration:  Delayed Tax Deposits Continue to Cause Lost
Interest for the Government (GAO/GGD-93-64, Mar.  22, 1993). 


      RETURN PROCESSING ACCURACY
      IMPROVED
---------------------------------------------------------- Letter :3.6

In 1993, IRS began using a new system to measure the accuracy of its
returns processing activity.  The measure is derived from the
Computer Assisted Pipeline Review (CAPR), which is a complete review
of all returns identified by service centers' computers as having
math or other errors needing resolution before processing at the
service centers can be completed.  CAPR information identifies who
was responsible for the error--service center staff or taxpayers,
which includes tax practitioners--and what part of the return was in
error. 

IRS had separate accuracy goals for the two service center groups
that are primarily responsible for processing returns.  The Code and
Edit Section, whose staff review returns to ensure that all data are
present and legible, had an accuracy goal of 94.4 percent in 1994. 
The goal for the Transcription Section, whose staff enter data from
the returns into the computer, was 94.1 percent.  As of the end of
June 1994, according to IRS data

  the Code and Edit Sections in the 10 service centers had achieved a
     combined accuracy rate of 95.3 percent, up from 94 percent for
     the same period in 1993 and

  the Transcription Sections in the 10 centers had achieved a
     combined accuracy rate of 95.8 percent, up from 94.9 percent for
     the same period in 1993. 

IRS also measures the extent to which taxpayers or their
representatives make errors in filling out their returns.  That data,
also as of the end of June 1994, showed an accuracy rate of 94.2
percent, well above IRS' goal of 88.3 percent.\4

Although these rates indicate that taxpayers correctly filed and IRS
accurately processed the great majority of returns, CAPR data show
that the EIC continues to cause particular problems for taxpayers and
tax practitioners. 


--------------------
\4 All accuracy goals apply to paper returns filed by taxpayers who
either were due a refund or did not pay the full amount of tax owed
at the time of filing (i.e., other than full-paid returns).  The
majority of returns IRS receives are other than full paid.  IRS
limits the goals to paper returns because electronic returns do not
go through the service centers' manual review and data entry
processes. 


      THE EIC CONTINUES TO BE A
      SOURCE OF MANY ERRORS
---------------------------------------------------------- Letter :3.7

As of July 2, 1994, 14.4 million taxpayers had received over $14.9
billion in EIC benefits--an increase compared to the 13.6 million
taxpayers who had received almost $12.8 billion at the same point in
time in 1993. 

The EIC continues to be a source of many mistakes by taxpayers and
tax practitioners in preparing returns, which, in turn, increases
IRS' error resolution workload.  Data from CAPR showed that in both
1993 and 1994, EIC-related mistakes were among the top errors made by
taxpayers and tax practitioners when preparing returns.  Other IRS
data showed that IRS found a total of about 1 million Schedule EIC
errors in 1994 and that taxpayers and practitioners had particular
difficulty in figuring the amount of earned income and the basic
credit and in determining "qualified" children.  While acknowledging
the many errors associated with the EIC, IRS officials noted that
more than 90 percent of the over 14 million Schedule EICs filed in
1994 were processed without change. 

In an effort to reduce errors and better ensure that only qualified
taxpayers received the EIC, IRS changed its procedures in 1993 by
requiring taxpayers to submit a completed Schedule EIC with their
returns when claiming the credit.  However, in 1994, some taxpayers
who claimed the credit did not submit the Schedule EIC.  CAPR data
showed that staff in the service centers' Code and Edit Sections
sometimes overlooked that taxpayers had not included the required
Schedule EIC.  According to IRS, when taxpayers do not include the
proper schedules, the Code and Edit Section should send a notice
instructing the taxpayer to submit the schedule in order for the
credit to be granted and the return to be processed.  When the Code
and Edit Section overlooks the missing schedule, it is up to other
departments to catch the error and correspond with the taxpayer. 
This delays the processing of the return, which then causes the
eligible taxpayer a delay in receiving the benefit. 

In another effort to reduce errors, IRS officials said that IRS will
make a greater effort in 1995 to encourage taxpayers to allow IRS to
compute their EIC. 


      CONTINUING INCREASE IN
      FRAUDULENT REFUND CLAIMS
---------------------------------------------------------- Letter :3.8

As we have discussed in past reports and testimonies and as shown in
table I.4 in appendix I, the number and dollar amount of IRS-detected
fraudulent refund claims, on both electronic and paper returns, have
been steadily increasing over the past several years.\5 That trend
continued in 1994.  By the end of June 1994, IRS had identified
58,828 returns involving fraudulent refunds, twice as many as had
been identified during the first 6 months of 1993.  Of that total,
34,713 were paper returns and 24,115 were electronic returns.  What
is unclear is (1) how much of this growth is due to increased
fraudulent activity rather than an improvement in fraud detection and
(2) how much additional fraud might be going undetected. 

In an effort to better control filing fraud, IRS has taken several
steps.  For example, IRS has (1) added additional up-front computer
checks in an attempt to prevent fraudulent returns from entering the
electronic filing system, (2) added staff to its fraud detection
teams in the service centers in an attempt to detect more fraudulent
returns, (3) initiated studies in an attempt to better understand the
fraudulent schemes confronting IRS, and (4) engaged the services of
the Los Alamos National Laboratory in an attempt to improve IRS'
ability to identify fraudulent refund claims through the use of
artificial intelligence and thus reduce expensive manual screening
procedures.  Also, at the request of the House Committee on Ways and
Means and its Subcommittee on Oversight, the Secretary of the
Treasury, in April 1994, established an interagency task force to
investigate refund fraud. 

Additional steps are planned for 1995.  For example, IRS has
tightened the standards for electronic return
originators--individuals and firms that are authorized to submit
returns electronically.  Among other things, new applicants will be
required to submit fingerprints that can be used to obtain a criminal
records check from the Federal Bureau of Investigation.  Although it
is unclear how such a procedure would work, IRS' intent is consistent
with a recommendation in our December 1992 report that IRS seek
access to National Crime Information Center data for the purpose of
checking the backgrounds of persons applying to be electronic return
originators.  IRS has also announced that it will be taking
additional steps to ensure that taxpayers claiming refunds use the
proper taxpayer identification number. 

In 1994, as in 1993, almost all of the fraudulent returns identified
by IRS involved EIC claims.  One of the studies undertaken by IRS in
1994 in an attempt to better understand fraudulent schemes involved a
sample of about 1,000 returns that were electronically filed in
January 1994 and that claimed the EIC.  As part of its study, IRS
contacted return preparers, taxpayers, and employers to confirm
income, filing status, and the existence of dependents.  As of
September 1, 1994, IRS was still analyzing the study results. 

Recent expansion of the EIC under the Omnibus Budget Reconciliation
Act of 1993 is expected to make about 6 million more persons eligible
for the credit and could encourage even more attempts to defraud the
system in 1995.  Those legislative changes expanded eligibility for
the EIC and increased the maximum credit amount. 


--------------------
\5 Tax Administration:  IRS Can Improve Controls Over Electronic
Filing Fraud (GAO/GGD-93-27, Dec.  30, 1992); Tax Administration: 
Increased Fraud and Poor Taxpayer Access to IRS Cloud 1993 Filing
Season (GAO/GGD-94-65, Dec.  22, 1993); Tax Administration: 
Electronic Filing Fraud (GAO/T-GGD-94-89, Feb.  10, 1994); and IRS
Automation:  Controlling Electronic Filing Fraud and Improper Access
to Taxpayer Data (GAO/T-AIMD/GGD-94-183, July 19, 1994). 


   TAXPAYERS CONTINUE TO HAVE
   PROBLEMS REACHING IRS BY
   TELEPHONE
------------------------------------------------------------ Letter :4

Taxpayers call IRS during the filing season for a variety of reasons. 
As we reported in the past, taxpayers have had problems reaching IRS
by telephone to get answers to their questions.\6

That problem worsened in 1994.  Not only did the accessibility of
IRS' toll-free telephone assistance decline, but taxpayers calling
IRS to order forms and taxpayers trying to use the TeleFile system
also had problems getting through. 


--------------------
\6 Tax Administration:  A Generally Successful Filing Season in 1991
(GAO/GGD-91-98, June 28, 1991); Tax Administration:  IRS' 1992 Filing
Season Was Successful but Not Without Problems (GAO/GGD-92-132, Sept. 
15, 1992); and Tax Administration:  Increased Fraud and Poor Taxpayer
Access to IRS Cloud 1993 Filing Season (GAO/GGD-94-65, Dec.  22,
1993). 


      TOLL-FREE ACCESSIBILITY
      CONTINUED TO DECLINE
---------------------------------------------------------- Letter :4.1

A key indicator of filing season performance is how well IRS serves
taxpayers who call toll-free telephone assistance to ask questions
about their account, the tax law, or IRS procedures.  Our analysis of
IRS' data on the toll-free telephone system shows that accessibility
during the 1994 filing season was lower than in 1993 while accuracy
of answers to tax law questions remained the same.  Accessibility
decreased primarily because of an increase in the number of calls
received while the number of calls answered remained fairly constant. 

As in our reviews of previous filing seasons, we measured
accessibility using information on actual calls from IRS' Telephone
Data Report.  We computed accessibility by dividing the total number
of calls answered by the total number of calls received, which we
defined as the sum of (1) calls answered, (2) busy signals, and (3)
calls abandoned by the caller before an assistor got on the line. 

For the period from January 2, 1994, through April 30, 1994, IRS
received 87.9 million calls and answered 18.6 million calls--an
accessibility rate of 21 percent.  This rate indicates that about
four out of five calls were not answered.\7 As shown in figure I.3 in
appendix I, the 1994 accessibility rate continued a downward trend
since 1989 and was 3 percentage points below last year.  On the other
hand, IRS' accuracy rate on answers to tax law questions during the
1994 filing season was 89 percent, the same rate as in 1993 and 26
percentage points higher than in 1989.\8

Demand for telephone assistance has increased in recent years. 
Despite this trend, IRS' fiscal year 1995 budget request included a
decrease of about 40 staff years at the toll-free call sites.  If
demand continues to increase, this reduction in resources could
exacerbate the accessibility problem. 


--------------------
\7 The number of calls received includes multiple attempts by the
same taxpayer to access the system.  Thus that number does not
represent the number of taxpayers calling IRS for assistance.  IRS is
working to develop a system that will enable it to better measure its
performance in terms of the number of taxpayers served. 

\8 To measure accuracy, IRS test callers place anonymous calls to
assistors and score their answers to various tax law questions. 


      ACCESSIBILITY TO FORMS
      VARIED
---------------------------------------------------------- Letter :4.2

Taxpayers can obtain tax forms, instructions, and publications
through telephone and mail orders placed with 1 of 3 IRS distribution
centers or by visiting 1 of IRS' over 600 walk-in sites.  Over 90,000
banks, post offices, and libraries also stock the more commonly used
forms and instructions.  During the 1994 filing season, we conducted
two limited tests of the level of service IRS provides to taxpayers
seeking copies of tax forms and publications.\9 Taxpayers were likely
to find tax materials they needed if they visited a walk-in site, but
they had to be persistent to order materials over the telephone. 


--------------------
\9 The tests were conducted during selected periods in March 1994 and
reflect conditions at those times. 


         TEST OF TOLL-FREE FORM
         ORDERING SYSTEM DISCLOSED
         TELEPHONE ACCESSIBILITY
         PROBLEMS
-------------------------------------------------------- Letter :4.2.1

In one test, we placed calls to each of IRS' three area distribution
centers that provide tax materials to walk-in sites and fill
taxpayers' telephone and mail orders.\10 These were toll-free
telephone calls but the toll-free telephone number for ordering forms
is different from the toll-free number taxpayers call when they have
a tax law or account question.  Each day, except Sunday, during a
2-week period in March 1994, we placed calls to the distribution
centers from Washington, D.C.; Mission, KS; and San Francisco.  We
did not order any materials; our intention was to test access to the
telephone order system.  If we received a busy signal when making a
call, we waited 1 minute after hanging up and then redialed.  If
after 9 redials (10 calls in total) we had not gotten through, we
considered the attempt unsuccessful. 

Of 100 attempts to contact a distribution center, 75 were successful
on the first try; 9 were successful after one redial; 11 were
successful after 2 or more redials; 3 were aborted after 9
unsuccessful redials; and 2 (both placed from Washington, D.C., on a
Saturday) were aborted after we let the phone ring for 2 minutes
without receiving either a busy signal or an answer.  Our 100
attempts to contact a distribution center required a total of 175
calls.  Of those 175 calls, we succeeded in getting through to an IRS
representative 95 times--a 54-percent accessibility rate. 

This result is consistent with data in IRS' Telephone Activity for
the Area Distribution Centers report.  Using the actual number of
busy signals and abandons from that report, we calculated an
accessibility rate of 53 percent for the first half of 1994.  We used
the same method to calculate this rate as we did to calculate the
accessibility rate for toll-free telephone assistance. 

While not disputing the accuracy of our 54-percent computation, IRS
officials responsible for forms distribution activities said that
they think the more meaningful result of our test was that 84 percent
of our attempted contacts were successful after only one or two
calls. 


--------------------
\10 The area distribution centers are in Richmond; Bloomington, IL;
and Sacramento, CA. 


         WALK-IN SITES STOCKED
         REQUIRED FORMS
-------------------------------------------------------- Letter :4.2.2

In the second test of forms and publications accessibility, we
visited 10 IRS walk-in sites in 6 states and Washington, D.C., during
the week of March 21, 1994, to see whether they had the 101 tax
forms, instructions, and publications that all walk-in sites were
required to stock for the 1994 filing season.  Of the 10 sites, 5 had
all of the required items; 4 were missing 1 item each; and 1 was
missing 4 items.  We made follow-up visits during the next week to
the five sites that were missing items and found that the site
missing four items and three of the sites missing one item had
received a new stock of those items.  The other site missing one item
received new stock of the item before the filing deadline of April
15. 

The results of our test of walk-in sites during the 1994 filing
season were better than the results from the last time we conducted
such a test in February 1992.  At that time, we visited 10 different
sites and found that no site had all of the required items; 4 sites
were missing 1 item; and 6 sites were missing between 2 and 5 items. 


      TELEFILE SYSTEM OVERLOADED
---------------------------------------------------------- Letter :4.3

IRS mailed 4.7 million TeleFile tax packages to taxpayers in the 7
states participating in the program in 1994.  IRS had projected that
almost 519,000 returns would be filed through TeleFile in 1994.  As
of mid-April 1994, IRS had received TeleFile returns in line with its
projection. 

The number of TeleFile returns might have been higher if the system
were better able to handle the volume of calls.  Using IRS data, we
computed a TeleFile accessibility rate of 13 percent for the period
January 13 through February 10, 1994, the peak period for TeleFile. 
We divided the total number of successful connections by the total
number of calls received, which we defined as the sum of successful
connections (about 547,000) and busy signals (about 3.8 million). 
There is no way to know how many individual taxpayers these busy
signals represented or how many of them might have used TeleFile had
they been able to get through. 

For the 1995 filing season, IRS will be expanding TeleFile to 3 more
states and plans to double the number of phone lines to 288.  IRS
expects that the additional telephone lines will help handle the
increased demand.  IRS will not test the use of a voice signature in
1995, which should shorten the length of some calls and thus also
help to increase IRS' capacity.  To further reduce busy signals, IRS
plans to publicize the best times to reach the TeleFile system.  Also
in 1995, IRS expects to learn how many different phone numbers have
been used to try to access the TeleFile system.  This information may
help IRS better estimate the number of taxpayers trying to use
TeleFile to file their returns. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

A successful filing season requires that IRS effectively manage
various programs.  IRS achieved many of its goals for processing tax
returns and assisting taxpayers and, in many respects, had a
successful 1994 filing season.  However, there continue to be some
serious problems. 

Once again this year, the incidence of detected refund fraud has
increased significantly.  While that trend is troubling in and of
itself, even more troubling is the uncertainty as to how much fraud
might be going undetected.  As IRS continues to add more controls and
increase its fraud detection capabilities, it continues to find more
fraud. 

The EIC continues to be a problem area for IRS and taxpayers.  It is
the source of many of the errors made by taxpayers and tax
practitioners in preparing returns, and almost all of the refund
fraud cases identified by IRS involve the EIC.  That situation may
only worsen in 1995 as more people become eligible to claim the
credit. 

Taxpayers continue to experience considerable difficulty reaching IRS
over the telephone, and those difficulties appear to be widening. 
According to IRS data, taxpayers in 1994 had problems not only
accessing IRS' toll-free telephone assistance but also contacting IRS
to order forms and publications and to file their returns.  An
inability to contact IRS by telephone can heighten taxpayer
frustration and contribute to a negative view of IRS. 

We are not making any recommendations to address these significant
problems because (1) there are several efforts already underway and
planned--such as the review being conducted by Treasury's Fraud Task
Force and IRS' plan to increase the number of telephone lines for
TeleFile--that should have a positive effect on these issues and (2)
we have other work underway, which is specifically targeted at those
issues and may help us better identify root causes. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

We met with IRS officials on September 26, 1994, to discuss a draft
of this report.  Except as noted below, they agreed with the matters
discussed in the report.  In some cases, they provided additional
information on events that occurred in 1994 and IRS' plans for 1995. 
We incorporated those comments where appropriate in the body of the
report. 

IRS officials disagreed with our methodology for computing telephone
accessibility.  They said that we focused on the number of calls
rather than the number of callers, thus overlooking the fact that
many callers could be using features, such as automatic redial, that
enable persons to continuously redial until they get through--thus
inflating the real demand for IRS assistance.  Although we agree that
the number of callers trying to reach IRS would be less than the
number of calls being made, IRS does not yet have a viable way to
measure accessibility based on the number of callers.  We have been
working with IRS to develop a better measure of telephone
accessibility.  Until then, we will continue using the measure we
have used in the past--the percent of incoming calls that are
answered. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to various congressional
committees, the Secretary of the Treasury, the Commissioner of
Internal Revenue, the Director of the Office of Management and
Budget, and other interested parties. 

Major contributors to this report are listed in appendix II.  Please
contact me on (202) 512-5407 if you have any questions. 

Sincerely yours,

Jennie S.  Stathis
Director, Tax Policy
 and Administration Issues


TRENDS IN FILING SEASON
PERFORMANCE INDICATORS
=========================================================== Appendix I

This is our ninth report on IRS' tax filing season for the House Ways
and Means Oversight Subcommittee.  We first reviewed IRS' performance
during the 1985 filing season.  In 1985, a combination of
insufficient computer capacity, inefficient software, and inadequate
training played a major role in creating returns processing backlogs
and document control problems.  As a result (1) more refunds were
delayed in 1985 than in the past and interest payments on late
refunds increased substantially, (2) many taxpayers had to file
duplicate returns to expedite receipt of their refunds, (3) many
erroneous taxpayers notices were issued, (4) correspondence and other
inventories increased, (5) the number of telephone calls from
taxpayers grew, (6) overtime costs increased, and (7) the
productivity of service center personnel declined significantly. 

Since then, IRS' service centers have acquired more computer
hardware; and computer programs that took many hours to run in 1985
are now running more efficiently.  IRS also improved its procedures
for dealing with computer-related problems and implemented ways that
taxpayers could file returns that bypass the labor intensive and
error-prone paper processing system.  IRS also established the
National Office Command Center in 1986 to coordinate and monitor the
resolution of hardware and software problems.  The command center
helps ensure that problems are addressed in a timely manner and helps
identify problems involving multiple locations. 

As a result of these changes, IRS' filing season performance has
generally improved over the past several years.  Receipts of
unpostables, error resolution, and adjustments/correspondence cases
have decreased (see tables I.1, I.2, and I.3),\11 refund timeliness
has increased, receipts of returns on other than paper have increased
along with the overall increase in the number of returns received
(see figs.  I.1 and I.2), and telephone tax law accuracy has
increased (see fig.  I.3).  However, not all of the trends are
positive.  The number of detected fraudulent refunds has increased
dramatically (see table I.4), and telephone accessibility has
decreased by 37 percentage points since 1989 (see fig.  I.3). 

   Figure I.1:  Number of
   Individual Income Tax Returns
   Filed in Fiscal Years 1986
   Through 1994

   (See figure in printed
   edition.)

Note:  Data for 1994 are for the period January 1 to September 9,
1994.  IRS estimates that 114.5 million individual income tax returns
will be filed by the end of fiscal year 1994. 

Source:  Data for 1986 through 1993 are from IRS annual reports. 
Data for 1994 are from IRS' Management Information System for Top
Level Executives. 

   Figure I.2:  Number of
   Individual Income Tax Returns
   Filed Electronically in Fiscal
   Years 1988 Through 1994

   (See figure in printed
   edition.)

Note:  1990 was the first year electronic filing was available
nationwide. 

Source:  Data for 1988 through 1993 are from IRS annual reports. 
Data for 1994 are from IRS' Management Information System for Top
Level Executives. 

   Figure I.3:  Comparison of
   Toll-Free Telephone
   Accessibility and Accuracy
   During the 1989 Through 1994
   Filing Seasons

   (See figure in printed
   edition.)

Source:  IRS' Management Information System for Top Level Executives
and IRS' Telephone Data Reports. 



                          Table I.1
           
            Unpostable Receipts for Individual Tax
            Returns in Calendar Years 1986 Through
                             1994

                     (Number in millions)

Calendar year                                Number received
----------------------------------------  ------------------
1986                                                    12.7
1987                                                    10.4
1988                                                    11.5
1989                                                     9.8
1990                                                     8.6
1991                                                     7.1
1992                                                     5.8
1993                                                     5.7
1994\a                                                   4.0
------------------------------------------------------------
\a Data as of September 9, 1994. 

Source:  IRS' Management Information System for Top Level Executives. 



                          Table I.2
           
           Error Resolution Receipts for Individual
              Tax Returns in Calendar Years 1988
                         Through 1994

                     (Number in millions)

                                           Number of returns
                                               sent to Error
Calendar year                                     Resolution
----------------------------------------  ------------------
1988                                                    24.7
1989                                                    22.0
1990                                                    21.4
1991                                                    19.7
1992                                                    21.0
1993                                                    19.6
1994\a                                                  17.7
------------------------------------------------------------
Note:  Comparable data for 1986 and 1987 were not available. 

\a Data as of September 9, 1994. 

Source:  IRS' Management Information System for Top Level Executives. 



                          Table I.3
           
                         Adjustments/
             Correspondence Receipts in Calendar
                   Years 1986 Through 1994

                     (Number in millions)

Calendar year                                Number received
----------------------------------------  ------------------
1986                                                    14.2
1987                                                    11.7
1988                                                    11.6
1989                                                    11.6
1990                                                    11.1
1991                                                    10.5
1992                                                    11.0
1993                                                    10.2
1994\a                                                   8.0
------------------------------------------------------------
Note:  IRS had computer problems in 1985 that caused problems in
processing returns and refunds.  The large number of
adjustments/correspondence receipts in 1986 compared with the
following years reflects, at least in part, one of the consequences
of those problems. 

\a Data as of September 9, 1994. 

Source:  IRS' Management Information System for Top Level Executives. 



                                    Table I.4
                     
                     Number of Detected Fraudulent Refunds in
                         Calendar Year 1986 Through 1994


Calendar                 Refunds                 Refunds                 Refunds
year       Returns       claimed   Returns       claimed   Returns       claimed
--------  --------  ------------  --------  ------------  --------  ------------
1986         4,856   $ 9,921,350         0           $ 0     4,856   $ 9,921,350
1987         4,363    12,713,058         0             0     4,363    12,713,058
1988         3,622    30,464,242        68       133,925     3,690    30,598,167
1989         3,326     7,244,981        67       350,459     3,393     7,595,440
1990         5,302    15,897,539       411     1,192,054     5,713    17,089,593
1991         5,422    32,273,983     5,746    10,656,046    11,168    42,930,029
1992        12,244    33,165,648    12,725    33,626,516    24,969    66,792,164
1993        51,883    82,764,145    25,957    54,000,206    77,840   136,764,351
1994\a      34,713  410,781,541\    24,115    50,772,345    58,828   461,553,886
                               b
================================================================================
Total      125,731  $635,226,487    69,089  $150,731,551   194,820  $785,958,038
--------------------------------------------------------------------------------
\a Data as of June 1994. 

\b This figure includes two returns claiming refunds totalling about
$350 million. 

Source:  IRS data. 


--------------------
\11 The introduction of new technology has also helped reduce the
volume of these receipts.  Because of up-front validity checks, for
example, returns filed electronically are much less likely to contain
errors than returns filed on paper and thus less likely to
necessitate correspondence and/or adjustments. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

David J.  Attianese, Assistant Director, Tax Policy and
 Administration Issues
Monika R.  Niemann, Evaluator

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Kelly A.  Wolslayer, Senior Evaluator

KANSAS CITY REGIONAL OFFICE

Doris J.  Hynes, Evaluator-in-Charge
H.  Yong Meador, Evaluator
Marge Vallazza, Reports Analyst

