Paperwork Reduction Act: Implementation at IRS (Letter Report, 11/16/98,
GAO/GGD-99-4).

Pursuant to a congressional request, GAO provided information on how the
Paperwork Reduction Act (PRA) has been implemented at the Internal
Revenue Service (IRS), focusing on: (1) the extent to which IRS'
paperwork burden estimates contribute to the governmentwide estimate,
and the extent to which those estimates have changed over time; (2)
factors that IRS believes affect its estimates; and (3) IRS concerns
about its burden-estimation methodology.

GAO noted that: (1) because IRS constitutes the preponderance of the
governmentwide paperwork burden-hour estimate, changes in IRS'
burden-hour estimate have a highly significant--and even
determinative--effect on the governmentwide total; (2) non-IRS
departments and agencies estimated that, in the aggregate, they had come
close to the 25-percent burden-reduction goal envisioned in the PRA of
1995 by the end of fiscal year 1998; (3) however, despite several
initiatives by the agency to reduce its paperwork burden, IRS'
burden-hour estimate increased by about 7.5 percent between fiscal years
1995 and 1998, resulting in an increase in the governmentwide estimate
of the paperwork burden imposed on nonfederal entities; (4) IRS said
that most of the increase in its burden-hour estimates was due to
factors outside of its control, such as changes in economic activity and
new legislative requirements; and (5) IRS is currently attempting to
change the way it measures paperwork burden to correct what it believes
are significant weaknesses in its current methodology, including
reliance on out-of-date data and questionable technical assumptions.

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

 REPORTNUM:  GGD-99-4
     TITLE:  Paperwork Reduction Act: Implementation at IRS
      DATE:  11/16/98
   SUBJECT:  Reporting requirements
             Agency missions
             Evaluation methods
             Data collection
             Tax administration systems
             Congressional/executive relations
             Tax returns
IDENTIFIER:  IRS TeleFile Program
             IRS Simplified Tax and Wage Reporting System
             
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Microsoft Word - wnn01!.PBF PAPERWORK REDUCTION ACT

Implementation at IRS

United States General Accounting Office

GA Report to the Chairman, Subcommittee on Oversight of Government

Management, Restructuring, and the District of Columbia, Committee
on Governmental Affairs, U. S. Senate


November 1998 

GAO/GGD-99-4

November 1998   GAO/GGD-99-4

United States General Accounting Office Washington, D. C. 20548

General Government Division

B-281169

Page 1 GAO/GGD-99-4 Paperwork Reduction Act

GAO November 16, 1998 The Honorable Sam Brownback Chairman,
Subcommittee on Oversight of Government

Management, Restructuring, and the District of Columbia Committee
on Governmental Affairs United States Senate

Dear Mr. Chairman: The Paperwork Reduction Act (PRA) was
originally enacted in 1980, but the act was amended and recodified
in 1995. One of the purposes of both the 1980 and the 1995 acts
was to minimize the paperwork burden for individuals, small
businesses, and others resulting from the collection of
information by or for the federal government. However, instead of
decreasing, federal agencies' overall annual paperwork burden
estimates have risen from about 1.5 billion hours in 1980 to more
than 7 billion hours in 1998. In each year since 1989, IRS'
paperwork estimate has accounted for nearly 80 percent of the
governmentwide estimate.

This report responds to your request that we provide you with
information on how the PRA has been implemented at the Internal
Revenue Service (IRS). Our specific objectives were to describe
(1) the extent to which IRS' paperwork burden estimates contribute
to the governmentwide estimate, and the extent to which those
estimates have changed over time; (2) factors that IRS believes
affect its estimates; and (3) IRS concerns about its burden-
estimation methodology.

Because IRS constitutes the preponderance of the governmentwide
paperwork burden- hour estimate, changes in IRS' burden- hour
estimate have a highly significant and even determinative effect
on the governmentwide total. Non- IRS departments and agencies
estimated that, in the aggregate, they had come close to the 25-
percent burden- reduction goal envisioned in the PRA of 1995 by
the end of fiscal year 1998. However, despite several initiatives
by the agency to reduce its paperwork burden, IRS' burden- hour
estimate increased by about 7.5 percent between fiscal years 1995
and 1998, resulting in an increase in the governmentwide estimate
of the paperwork burden imposed on nonfederal entities. IRS said
that most of the increase in its burden- hour estimates was due to
factors outside of its control, such as changes in economic
activity and new legislative requirements. IRS is currently
attempting to change the way it measures paperwork burden to
correct what it believes are Results in Brief

B-281169 Page 2 GAO/GGD-99-4 Paperwork Reduction Act

significant weaknesses in its current methodology, including
reliance on out- of- date data and questionable technical
assumptions.

Information collection is one way in which regulatory agencies
carry out their missions, such as collecting taxes, keeping
workplaces safe and the banking system secure, and protecting the
environment. Without such information, for example, IRS would not
know the amount of tax owed by taxpayers. However, agencies are
obligated under the PRA to keep the amount of paperwork as low as
possible, while still fulfilling their missions.

Paperwork burden is defined in the PRA as including the time,
effort, or financial resources expended to generate, maintain, or
provide information to or for a federal agency. Paperwork burden
is commonly measured in terms of burden hours, reflecting the
amount of time agencies estimate it will take nonfederal entities
to comply with their information collection requirements.

The PRA of 1980 established the Office of Information and
Regulatory Affairs (OIRA) within the Office of Management and
Budget (OMB) to provide central agency leadership and oversight of
governmentwide efforts to reduce unnecessary paperwork burden and
improve the management of information resources. The PRA of 1995
reaffirmed the principles of the original act, expanded OIRA's
leadership role, and gave new responsibilities to executive branch
agencies. 1 Like the original statute, the 1995 act requires
agencies to justify any collection of information from the public
by establishing the need and intended use of the information,
estimating the burden that the collection will impose on the
respondents, and showing that the collection is the least
burdensome way to gather the information.

The PRA of 1995 took effect on October 1, 1995, and required OIRA
to set annual governmentwide goals for the reduction of
information collection burdens by at least 10 percent in fiscal
years 1996 and 1997 and by at least 5 percent in each of the
succeeding 4 fiscal years. The act also required OIRA to establish
annual agency burden- reduction goals that represent the maximum
practicable opportunity in each agency. OIRA establishes these
agency goals in an annual Information Collection Budget (ICB) that
also describes each agency's accomplishments during the preceding
fiscal

1 See Regulatory Management: Implementation of Selected OMB
Responsibilities Under the Paperwork Reduction Act (GAO/GGD-98-
120, July 9, 1998) for a discussion of how OIRA has carried out
its responsibilities. Background

B-281169 Page 3 GAO/GGD-99-4 Paperwork Reduction Act

year and planned initiatives for the current fiscal year to
minimize paperwork burden. In January 1997, OMB instructed
executive departments and agencies to prepare and implement ICBs
and information streamlining plans that would include goals and
timetables to achieve, by the end of [fiscal year] 1998, a
cumulative burden reduction of 25 percent from their [fiscal year]
1995 year- end level, consistent with the governmentwide burden-
reduction goals in the Paperwork Reduction Act of 1995.

It is important to recognize that the basic data used to gauge
paperwork burden have significant limitations. Estimating the
amount of time it will take for an individual or business to
collect and provide information or how many individuals and
businesses an information collection will affect is not a simple
matter. It is often unclear to what degree agency burdenhour
estimates reflect real burden and difficult to determine the
factors that cause changes to the estimates. Therefore, users of
those estimates should interpret them with caution. Nevertheless,
there are no better indicators of paperwork burden available.
Burden- hour estimates can be useful as long as their limitations
are borne in mind.

To describe the contribution of IRS' burden- hour estimates to the
governmentwide estimate and changes in those estimates over time,
we reviewed our previous reports and testimonies on the PRA and
obtained additional information from OIRA's ICB for fiscal year
1998 2 and from the Department of the Treasury's paperwork
officer. We also obtained information from the ICB on the factors
that IRS believes affect its paperwork burden totals. We contacted
IRS officials to identify the agency's concerns about its burden
estimation methodology and to obtain information on recent IRS
efforts to improve the measurement of its paperwork burden. We did
not assess the accuracy of any of the burdenhour estimates
included in this report.

At the conclusion of our review, we obtained comments on a draft
of this report from IRS' Chief Operations Officer, whose comments
are reflected at the end of this report. We conducted our review
in August and September 1998 in accordance with generally accepted
government auditing standards.

2 Office of Management and Budget, Office of Information and
Regulatory Affairs, Information Collection Budget of the United
States Government, July 20, 1998. Scope and

Methodology

B-281169 Page 4 GAO/GGD-99-4 Paperwork Reduction Act

As figure 1 illustrates, because IRS has accounted for nearly 80
percent of the governmentwide paperwork burden- hour estimate in
each of the past 10 years, changes in IRS' paperwork burden
estimates have had a substantial impact on the governmentwide
trends. The near tripling of the governmentwide burden- hour
estimate during fiscal year 1989 was primarily caused by IRS'
adoption of a new methodology for computing burden, which
increased its paperwork estimate by about 3.4 billion hours.
However, this increase did not signify an actual increase in
burden, only an increase in the estimate of that burden. The
actual burden imposed on the public was unaffected by the changes
to the estimation process.

Note: Data are estimated as of September 30 each year. Data for
1998 are projections reported in the July 1998 ICB.

Source: OMB and Department of the Treasury.

IRS' Burden- Hour Estimates Have Increased

Figure 1: Changes in IRS and Governmentwide Burden- Hour Estimates
Between Fiscal Years 1980 and 1998

B-281169 Page 5 GAO/GGD-99-4 Paperwork Reduction Act

When the PRA of 1995 took effect on October 1, 1995, IRS'
estimated burden- hour total was slightly less than 5.3 billion
hours. Achievement of a 25- percent reduction in that baseline in
accordance with the governmentwide goals envisioned in the PRA
would have put IRS' total at just under 4 billion burden hours by
September 30, 1998. However, when the ICB was published in July
1998, IRS projected that its burden- hour total would be nearly
5.7 billion hours by the end of fiscal year 1998 about a 7.5
percent increase from IRS' fiscal year 1995 baseline. In contrast,
agencies outside of IRS have, in the aggregate, reported that they
reduced their paperwork burden by nearly 21 percent since
September 30, 1995. More than half of the departments and agencies
identified in the ICB reduced their burden- hour estimates during
this period, some by more than 40 percent. However, because IRS
constitutes nearly 80 percent of the governmentwide burden- hour
estimate, IRS' 7.5 percent burden- hour increase has more than
offset the reductions reported by the other agencies. As a result,
the governmentwide burden- hour estimate has increased by about 1
percent since the PRA took effect at the end of fiscal year 1995.
(See fig. 2.)

B-281169 Page 6 GAO/GGD-99-4 Paperwork Reduction Act

Note: The governmentwide burden- reduction goal for this 3- year
period was 25 percent. Source: OMB and Department of the Treasury.

The July 1998 ICB stated that initiatives by IRS and other parts
of the Department of the Treasury had eliminated more than 100
million hours of paperwork burden between fiscal years 1995 and
1998. For example, the report stated that IRS had done the
following:

 Reduced the burden associated with IRS Form 1040EZ by 3.7 million
hours for tax year 1996 by encouraging taxpayers to use the 1040
TeleFile, IRS' telephone- based filing system.

 Expanded the use of the TeleFile program for businesses, thereby
reducing the burden associated with IRS Form 941 (Employer's
Quarterly Federal Tax Return) by an estimated 14 million hours
during fiscal year 1998.

 Raised the threshold for which businesses had to maintain
receipts to substantiate expenses for travel, entertainment,
gifts, and listed property,

Figure 2: Percentage Changes in IRS, Non- IRS, and Governmentwide
BurdenHour Estimates Between Fiscal Years 1995 and 1998

Economic Activity and New Legislation Reportedly Affect Burden

B-281169 Page 7 GAO/GGD-99-4 Paperwork Reduction Act

reducing the burden by an estimated 12.5 million hours during
fiscal year 1997.

 Required those who file 250 or more of IRS Form 1042- S (Annual
Withholding Tax Return for U. S. Source Income of Foreign
Withholding) to do so on magnetic media, producing an estimated
burden reduction of 21.1 million hours during fiscal year 1997.

The ICB also said that IRS has several long- term initiatives to
reduce burden through the use of information technology and
reengineered processes. For example, the report stated that the
agency's Simplified Tax and Wage Reporting System streamlining
initiative has established a number of prototypes to demonstrate
the feasibility of single- point federal and state filing,
electronic filing, streamlined customer service, and simplified
legal requirements for tax and wage reporting by employers.

Despite these completed and long- term efforts, IRS' overall
burden estimate increased by about 400 million hours between
fiscal years 1995 and 1998. The July 1998 ICB indicated that this
increase in the estimate was largely because of increased economic
activity and new legislation that required new information
collections. For example, the report said that an increase in the
number of filings of the IRS U. S. Partnership Return of Income
alone resulted in an increase of more than 225 million burden
hours. It also said IRS anticipated that increased usage of the U.
S. Tax Return for Estates and Trusts would add more than 77
million burden hours.

IRS and other agencies have contended for years that the bulk of
their paperwork burden is directly attributable to the statutes
that determine their mission. As a result, they say it is
difficult or even impossible to substantially reduce paperwork
burden and still comply with existing statutory requirements. 3
Also, the ICBs for the past several years have reported that
agencies' burden- hour estimates have increased because of new
statutory requirements. The July 1998 ICB contains several
examples of recent statutes that it says increased IRS's
information collection activities. For example:

 The ICB said that the Taxpayer Relief Act of 1997 (P. L. 105- 34)
significantly increased the burden imposed on individual and
business taxpayers, largely because of new provisions for the
calculation and

3 See Paperwork Reduction: Burden Reduction Goal Unlikely To Be
Met (GAO/ T- GGD/ RCED- 96- 186, June 5, 1996) and Paperwork
Reduction: Governmentwide Goals Unlikely To Be Met (GAO/ T- GGD-
97114, June 4, 1997).

B-281169 Page 8 GAO/GGD-99-4 Paperwork Reduction Act

reporting of taxes owed on capital gains that required a major
expansion of Schedule D for the Form 1040 (U. S. Income Tax
Return). The report said the act required revisions to a total of
230 existing forms and their instructions, and that changes in
just 5 of the forms would result in an increase of 60 million
burden hours.

 The report said that IRS had to create a new form to implement a
provision in the Disaster Assistance Act of 1988 to allow
voluntary withholding of income tax from various federal payments,
and that this new form imposes a burden of 9.7 million hours.

 The ICB said that the Small Business Job Protection Act of 1996
required IRS to add new tax code references and lines to Form
1065, U. S. Partnership Return of Income, which added 4.3 million
burden hours.

IRS officials said that the agency would not be able to reduce its
paperwork burden if new statutes requiring information collections
continue to be enacted and unless changes are made to the
substantive requirements in the current tax code. Relatedly,
business officials and tax experts have also told us that the
complexity of the tax code and the frequent changes that are made
to the code are the driving forces behind federal tax compliance
burden in general, not just paperwork burden. 4

Neither OIRA nor we have assessed the extent to which IRS'
paperwork burden is directly attributable to statutory
requirements and, therefore, is beyond the agency's control. If
IRS' paperwork requirements truly are statutorily mandated, IRS
may not be able to reduce its paperwork burden by the amounts
envisioned in the PRA of 1995 without changes to the legislation
underlying those requirements. However, even though a statute may
require IRS to take certain actions, the agency may have
discretion regarding whether paperwork requirements need to be
imposed and, if so, the manner or frequency with which the
information is collected.

IRS currently measures its paperwork burden using a formula partly
based on the number of lines on the forms to be completed. That
methodology was first put in place in 1988, which resulted in the
previously mentioned 3.4 million- hour increase in IRS' paperwork
burden estimate during fiscal year 1989.

Although IRS said it believes this methodology significantly
improved its ability to measure taxpayer burden, the agency now
has determined that the methodology has a number of significant
weaknesses. For example,

4 Tax System Burden: Tax Compliance Burden Faced by Business
Taxpayers (GAO/T-GGD-95-42, Dec. 9, 1994). IRS' Efforts to Measure

Paperwork Burden

B-281169 Page 9 GAO/GGD-99-4 Paperwork Reduction Act

the methodology is based on 1984 survey data that may no longer be
relevant because of changes in tax laws and increased use of
computers and tax preparation software. Also, the methodology does
not reflect reductions in paperwork burden attributable to
improvements in IRS' customer service activities. Finally, IRS
believes the methodology relies on questionable technical
assumptions (e. g., that adding lines to a form will always
increase burden).

Therefore, IRS is currently reexamining its taxpayer burden
measures. It has drafted a statement of work soliciting contractor
support to develop an improved methodological approach for
measuring taxpayer burden. However, this reexamination effort will
not be easy. In 1995, IRS issued a similar request for proposals
seeking contractors to develop an approach for measuring taxpayer
burden; but, according to IRS, no contractors were interested in
doing the work. Earlier this year, we reported on the challenges
IRS faces in developing and implementing performance measures to
gauge its efforts to reduce taxpayer burden through improved
customer service. 5 One such challenge that we identified is
developing a reliable measure of taxpayer burden, including the
portion that IRS can influence.

As a result of IRS' reexamination of its taxpayer burden measures,
it is unclear whether the agency's burden- hour estimate will go
up, go down, or remain the same. Because IRS is not sure whether
its burden- hour estimate is accurate and because IRS' estimate
represents nearly 80 percent of the governmentwide paperwork
burden estimate, it is also unclear whether the governmentwide
burden- hour estimate is accurate.

We obtained written agency comments on a draft of this report on
October 15, 1998, from IRS' Chief Operations Officer. He said the
report accurately reflects how IRS has implemented the PRA.

We are sending copies of this report to the Ranking Minority
Member of the Senate Committee on Governmental Affairs'
Subcommittee on Oversight of Government Management, Restructuring
and the District of Columbia; other interested committees; the IRS
Commissioner; and the Administrator of OIRA. We will also make
copies available to others on request.

5 Tax Administration: IRS Faces Challenges in Measuring Customer
Service (GAO/GGD-98-59, Feb. 23, 1998). Agency Comments

B-281169 Page 10 GAO/GGD-99-4 Paperwork Reduction Act

Major contributors to this letter were Curtis Copeland, Assistant
Director, and Elizabeth Powell, Evaluator- in- Charge. Please
contact me at (202) 512- 8676 if you have any questions.

Sincerely yours, L. Nye Stevens Director Federal Management and

Workforce Issues

Page 11 GAO/GGD-99-4 Paperwork Reduction Act

Page 12 GAO/GGD-99-4 Paperwork Reduction Act

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