Tax Administration: IRS' Fiscal Year 1996 and 1997 Budget Issues and the
1996 Filing Season (Testimony, 03/28/96, GAO/T-GGD-96-99).

GAO examined the Internal Revenue Service's (IRS) financial condition,
focusing on the: (1) status of the 1996 filing season; and (2) IRS
fiscal year (FY) 1997 budget request. GAO found that: (1) the FY 1996
appropriation for IRS was $7.3 billion, $860 million less than the
President requested and $160 million less than the FY 1995 IRS
appropriation; (2) to mitigate the funding shortfall, IRS initiated a
hiring freeze and reduced its travel and overtime costs, cash awards,
hours for seasonal staff, and nonpermanent staff; (3) IRS is delaying
fewer refunds in 1996 and validating taxpayers' social security numbers
and earned income credit claims; (4) taxpayers are having an easier time
contacting IRS by telephone, with the accessibility rate increasing 9
percent over 1995; (6) IRS is requesting a budget increase of $647
million for FY 1997 to develop certain compliance initiatives and
correct weaknesses in the Tax Systems Modernization Program (TSM); and
(7) IRS is having problems ensuring data accuracy for revenue generated
by its enforcement activities and correcting TSM managerial and
technical weaknesses.

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

 REPORTNUM:  T-GGD-96-99
     TITLE:  Tax Administration: IRS' Fiscal Year 1996 and 1997 Budget 
             Issues and the 1996 Filing Season
      DATE:  03/28/96
   SUBJECT:  Systems conversions
             Tax returns
             Computerized information systems
             Reductions in force
             Data integrity
             Electronic forms
             Telephone communications operations
             Tax refunds
             Budget cuts
             Tax administration systems
IDENTIFIER:  TSM
             Earned Income Tax Credit
             IRS Automated Collection System
             IRS Document Matching Program
             IRS Service Center Recognition/Image Processing System
             IRS Volunteer Income Tax Assistance Program
             IRS Tax Counseling for the Elderly Program
             IRS TeleFile Program
             IRS Cyberfile
             IRS 1040PC Program
             IRS Enforcement Revenue Information System
             IRS Earned Income Credit Compliance Initiative
             IRS Tax System Modernization Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EST
on Thursday
March 28, 1996

TAX ADMINISTRATION - IRS' FISCAL
YEAR 1996 AND 1997 BUDGET ISSUES
AND THE 1996 FILING SEASON

Lynda D.  Willis
Director, Tax Policy and Administration Issues
General Government Division

GAO/T-GGD-96-99

GAO/GGD-96-99t


(268716)


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

  ACS - x
  TSM - x
  IRS - x
  RIF - x
  SCRIPS - x
  ERIS - x
  SSN - x

TAX ADMINISTRATION:  IRS' FISCAL
YEAR 1996 AND 1997 BUDGET ISSUES
AND THE 1996 FILING SEASON
====================================================== Chapter SUMMARY

IRS' fiscal year 1996 appropriation was $7.3 billion--$860 million
less than what the President had requested and $160 million less than
IRS' fiscal year 1995 appropriation.  To cover the labor cost
shortfall that resulted, IRS officials said that they took a number
of actions.  These included reducing (1) travel and overtime costs,
(2) cash awards, (3) hours for seasonal staff, and (4) the number of
nonpermanent staff.  In making these reductions, IRS said that it
wanted to ensure that it had sufficient staff to do what it saw as
its most critical function--processing returns and issuing refunds. 
As a result, most of the cuts were absorbed by certain compliance
programs. 

The 1996 filing season seems to be going more smoothly than last
year's in some key respects.  Most importantly, IRS is delaying fewer
refunds this year while it validates Social Security Numbers and
Earned Income Credit claims.  IRS revised its procedures this year to
better target its validation efforts.  Also, taxpayers appear to be
having an easier time reaching IRS by telephone this year and more
taxpayers are using alternative return filing methods.  Despite the
improvements, there are still several concerns.  For example, the
percent of calls IRS answers compared to the number it receives is
still low.  Through March 9, 1996, the accessibility rate was 20
percent compared with 11 percent for the comparable time period last
year.  Also, IRS closed many walk-in sites this year that had
provided assistance to taxpayers in the past. 

IRS is requesting almost $8 billion for fiscal year 1997, an increase
of $647 million from fiscal year 1996.  The largest increases are (1)
$359 million for certain compliance initiatives and (2) $155 million
for Tax Systems Modernization (TSM).  Both of these areas have been
problematic for IRS in the past.  Although IRS has taken steps to
address some of GAO's concerns with past compliance initiatives,
there are still some questions that remain appropriate in discussing
the current request. 

For example, does IRS have reliable data on the revenue generated by
its enforcement activities?  Regarding TSM, GAO identified managerial
and technical weaknesses in July 1995 that IRS has not yet corrected. 
As a result, GAO does not believe that IRS can make effective use of
TSM systems development funds at this time. 


TAX ADMINISTRATION:  IRS' FISCAL
YEAR 1996 AND 1997 BUDGET ISSUES
AND THE 1996 FILING SEASON
==================================================== Chapter STATEMENT

Madam Chairman and Members of the Subcommittee: 

We are pleased to be here today to participate in the Subcommittee's
inquiry into the Internal Revenue Service's (IRS) financial condition
for 1996, the status of the 1996 filing season, and the
administration's fiscal year 1997 budget request for IRS. 

Our statement is based on work we have been doing for the
Subcommittee and our past reviews of filing season activities, Tax
Systems Modernization (TSM), and compliance initiatives. 

In our statement, we address the following four issues: 

  According to IRS officials, IRS' actions to reduce staffing through
     a hiring freeze and an early-out program were not sufficient to
     cover the labor-cost shortfall that resulted from an
     approximately $860-million reduction in IRS' budget request for
     fiscal year 1996.  To further cover the shortfall, IRS reduced
     support costs, cut the number of hours for seasonal employees,
     and reduced the number of nonpermanent staff.  In making these
     reductions, IRS wanted to ensure that it had enough staff to
     process tax returns and issue refunds in a timely manner.  As a
     result, programs directed at identifying noncompliance and, to a
     lesser extent, assisting taxpayers, absorbed most of the cuts. 

  Notwithstanding the budget cuts that affected some of IRS' taxpayer
     assistance programs, this year's filing season seems to be
     progressing more smoothly than did last year's in some key
     respects.  Most importantly, IRS is delaying fewer refunds this
     year while it validates Social Security Numbers (SSN) and Earned
     Income Credit claims.  IRS revised its procedures for 1996 in an
     attempt to better target its efforts and impose less of a burden
     on honest taxpayers.  Also, telephone accessibility has
     improved, and more taxpayers are using alternative return-filing
     methods.  Although this filing season appears to be going more
     smoothly in these respects, there are still several concerns. 
     For example, (1) although telephone accessibility has improved,
     it is still very low; (2) IRS closed many walk-in sites this
     year that had provided assistance to taxpayers in the past; and
     (3) the document imaging system being used to process some
     individual income tax forms is still not meeting its original
     expectations. 

  The administration is requesting almost $8 billion for IRS for
     fiscal year 1997, an increase of $647 million from fiscal year
     1996.  Of that request, $850 million is for TSM, $155 million
     more than in 1996.  TSM is plagued by numerous managerial and
     technical weaknesses that we identified in a July 1995 report.\1
     Although IRS has initiated actions in response to these
     weaknesses, those efforts provide little assurance that the
     weaknesses will be corrected in the near term.  As a result, we
     believe that additional investments in TSM are at risk. 

  The largest program increase in IRS' fiscal year 1997 budget
     request is $359 million for certain compliance programs.  Our
     past work on compliance initiatives identified several problem
     areas, including (1) IRS' inability to fully implement past
     initiatives, (2) the inaccuracy of IRS' tracking of the revenue
     from such initiatives, and (3) the focus of past collection
     initiatives on hiring revenue officers instead of more
     productive collection staff.  Although IRS has taken some
     actions to address our concerns, some issues remain,
     particularly in terms of the reliability of IRS' data. 


--------------------
\1 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
July 26, 1995). 


   OVERVIEW OF IRS' FINANCIAL
   CONDITION IN FISCAL YEAR 1996
-------------------------------------------------- Chapter STATEMENT:1

IRS' fiscal year 1996 appropriation was $7.3 billion.  That amount
was about $860 million less than the President requested for fiscal
year 1996 and about $160 million less than IRS' fiscal year 1995
appropriation. 

In June 1995, anticipating possible reductions from the amount the
President had requested for fiscal year 1996, IRS began taking steps
to reduce its staffing levels.  On June 30, 1995, IRS announced a
hiring freeze.  Earlier in 1995, IRS had announced an early-out
program without incentives for employees affected by its district
office and regional office consolidations.  After enactment of its
final appropriation, IRS reopened the early-out program through
February 3, 1996, and made it available to all employees.  About
1,690 staff retired as a result of this program. 

To further cut costs, IRS officials said that IRS (1) reduced
employee cash awards by 20 percent, for a savings of $11 million;\2
(2) reduced travel and overtime costs by $49 million; (3) reduced the
workhours of seasonal employees\3 by as much as 40 percent; and (4)
cut back on the use of nonpermanent staff, such as term employees.\4
IRS officials also said that the above actions enabled them to avert
a reduction-in-force (RIF).  According to IRS officials, by the time
IRS would have been able to implement a RIF for fiscal year 1996, the
cost would have exceed the savings. 

As of March 1, 1996, according to IRS officials, IRS had about $140
million in unfunded mandatory nonlabor costs for fiscal year 1996. 
Some of those unfunded costs were for telecommunications, postage,
and rent.  IRS officials said that they are hoping to resolve these
unfunded costs without having to resort to furloughs. 

Part of the $140 million shortfall stems from lower user-fee receipts
than expected.  IRS' fiscal year 1996 appropriation assumed a receipt
of $119 million from user fees.  IRS now expects to receive from $60
to $70 million in such fees for fiscal year 1996. 


--------------------
\2 According to IRS officials, IRS considered eliminating all cash
awards but decided against that option. 

\3 Although IRS' seasonal staff work less than a traditional 40-hour
week, 52-week schedule, they are permanent employees. 

\4 Term employees are hired for a finite period of time.  During that
time, they have employment rights similar to those of permanent
employees.  However, they can be released once their term expires. 


      STAFFING CUTS IN THE
      DOCUMENT MATCHING PROGRAM
      AND AT AUTOMATED COLLECTION
      SYSTEM CALL SITES
------------------------------------------------ Chapter STATEMENT:1.1

As noted earlier, IRS' actions to reduce labor costs involved steps
directed at seasonal and nonpermanent staff.  Most of IRS' seasonal
and non-permanent staff (1) help process tax returns during the
filing season, (2) assist taxpayers either at walk-in offices or over
the telephone, and (3) work in compliance programs that do not
require face-to-face interaction with taxpayers.  IRS officials told
us that in deciding which areas to cut, IRS wanted to ensure that it
could process tax returns and issue refunds in a timely manner.  As a
result, most of IRS' staffing cuts affected its compliance programs,
with some cuts in the taxpayer service area. 

According to IRS officials, the two compliance programs that employ
the largest number of seasonal and term staff are (1) the Document
Matching program, through which IRS identifies taxpayers that either
underreport their income or do not file required tax returns, and (2)
the Automated Collection System (ACS), through which IRS staff try to
contact delinquent taxpayers or nonfilers by telephone and resolve
the delinquency.  Because IRS' cost-cutting measures for fiscal year
1996 focused on seasonal and nonpermanent staff, these two programs
were significantly affected. 


      DOCUMENT MATCHING
------------------------------------------------ Chapter STATEMENT:1.2

Through the Document Matching program, IRS matches income reported on
tax returns with information provided by third parties, such as wage
information from employers and interest and dividend information from
financial institutions.  Those matches are to identify taxpayers that
underreported their income (underreporters) and those that did not
file required tax returns (nonfilers). 

According to IRS, it spent about 1,950 staff years on underreporter
activities in fiscal year 1995 and closed 4.1 million cases with
recommended tax assessments of $1.7 billion.  Because of staff
reductions, IRS estimates that it will spend about 1,300 staff years
on underreporter activities in 1996--about a 33-percent
reduction--and close about 1.5 million fewer cases.  IRS estimates
that its assessments from closed cases will be $1.4 billion, $300
million less than in 1995.  IRS' matching program also identifies
taxpayers who have not claimed refunds to which they are entitled. 
In fiscal year 1995, IRS issued $120 million in refunds through that
program.  IRS expects that amount to drop to $95 million in 1996
because of staff reductions. 

Also under the Document Matching program, IRS creates returns for
nonfilers using information documents provided by third parties. 
According to IRS, it spent about 600 staff years on that effort in
fiscal year 1995, closed about 810,000 cases, and assessed $1.9
billion.  Because of staff reductions, IRS estimates that it will
spend about 370 staff years on this effort in fiscal year 1996--about
a 38-percent reduction--and close about 180,000 fewer cases.  IRS
estimates that assessments from closed cases will be $1.3 billion,
$650 million less than in 1995. 


      AUTOMATED COLLECTION SYSTEM
------------------------------------------------ Chapter STATEMENT:1.3

Once a tax delinquency or delinquent return is identified, IRS uses a
three-stage process to collect the tax or secure the return.  In the
first stage, taxpayers are mailed a series of notices.  If the case
is not resolved at this point and meets certain criteria, it is
transferred to ACS.  At this stage, IRS staff in call sites contact
the taxpayer or nonfiler by telephone.  If the case remains
unresolved at this point and meets certain criteria, it is
transferred to a revenue officer, who is to visit the taxpayer or
nonfiler or take other steps to secure the delinquent return and/or
collect the delinquent tax. 

Because of various factors discussed in the appendix, ACS had a
significant number of seasonal, term, and other than full-time
permanent staff at the end of fiscal year 1995--66 percent more than
it had at the end of fiscal year 1994.  As a result, ACS was targeted
for a significant staff reduction when IRS decided to reduce the
number of hours for seasonal staff and not extend appointments for
term employees. 

IRS officials subsequently decided that the budget impact on ACS was
too severe.  To mitigate the impact, IRS negotiated with the National
Treasury Employees Union to allow the detail of about 300 revenue
officers and other compliance staff to ACS.  These details are to
remain in effect for at least 1 year.  IRS officials said that they
plan to revisit this agreement with the union once IRS knows its
budget situation for fiscal year 1997. 


   THE 1996 FILING SEASON SEEMS TO
   BE GOING MORE SMOOTHLY THAN
   LAST YEAR'S IN CERTAIN KEY
   RESPECTS
-------------------------------------------------- Chapter STATEMENT:2

On the basis of our past filing season reviews, we had several
questions going into the 1996 filing season: 

  How will IRS' staffing reductions for fiscal year 1996 affect its
     ability to process returns and assist taxpayers? 

  Will last year's drop in the number of electronic filings be
     reversed? 

  What can taxpayers expect in the way of refund delays in 1996? 

  Will the steady decline in the accessibility of IRS' telephone
     assistance over the past several years continue? 

  Has the performance of IRS' Service Center Recognition/Image
     Processing System (SCRIPS) improved? 

As discussed below, preliminary information addressing these
questions indicates that, in certain key respects, the 1996 filing
season is progressing more smoothly than did the 1995 season.  As
also discussed below, however, there are still several concerns that
we will be monitoring during our continuing assessment of filing
season activities.  Specifically, (1) although telephone
accessibility is up, it is still very low; (2) IRS closed many
walk-in sites this year that had provided assistance to taxpayers in
the past; and (3) SCRIPS is still not meeting its original
expectations. 


      EFFECT OF STAFFING CUTS ON
      FILING SEASON
------------------------------------------------ Chapter STATEMENT:2.1

In deciding where to make the staffing cuts for fiscal year 1996, IRS
wanted to make sure it had enough staff to do its most critical
functions--process returns and issue refunds--in a timely manner. 
Available data indicate that IRS has been successful in that regard. 
As of March 15, 1996, IRS' 10 service centers had processed 71
percent of the paper individual income tax returns they had received
(the same percent as last year), and the centers were processing that
workload in about the same cycle time as last year (within an average
of 8 to 13 days, depending on the type of individual income tax
return filed). 

IRS service center officials told us that refunds may be going out a
couple of days slower than last year but still within the 40 days
that IRS promises taxpayers in its customer service standards. 
Service center officials told us that IRS had decided to focus on
meeting the 40-day standard in 1996 rather than incur the extra costs
associated with trying to beat it.  However, we were unable to verify
whether the refund cycle time has changed because the data we use to
track refund timeliness were not available at the time we prepared
this statement. 

Although IRS has apparently been able to process returns and issue
refunds this year without any significant problems, staffing cuts in
other areas could be affecting its ability to serve taxpayers and
identify questionable refund claims. 


      TAXPAYER SERVICE
------------------------------------------------ Chapter STATEMENT:2.2

In the taxpayer service area, IRS closed 93 walk-in assistance sites,
reduced the operating hours of some of the 442 sites that remained
open, and eliminated free electronic filing at 195 of the sites. 
According to IRS, the closed sites were selected on the basis of
their historical volume of work and their proximity to other walk-in
sites.  As an indication of the effect of these closures and
cutbacks, IRS data show that walk-in sites served about 1.7 million
taxpayers from January 1 through March 9, 1996--about 16 percent
fewer taxpayers than were served at the same time last year. 

Walk-in sites provide various free services, including copies of the
more commonly used forms and publications, help in preparing returns,
and answers to tax law questions.  There are other ways taxpayers can
obtain those services free, although maybe not as easily. 

Taxpayers needing forms and publications, for example, might find
them at their local library or can get them by calling IRS' toll-free
forms-ordering number.  Our reviews of past filing seasons showed
that taxpayers were generally able to get through to IRS when they
called the forms-ordering number, and the forms distribution centers
did a good job accurately filling orders.  However, according to IRS,
it will generally take from 7 to 15 workdays to receive what you
order, if it is in stock.  Taxpayers with access to a computer can
download forms from Internet or the FedWorld computer bulletin board. 
Forms are also available on CD-ROM and through IRS' "fax on demand"
service. 

Taxpayers who need help preparing their returns and do not want to
pay for that help might be able to take advantage of the tax
preparation services offered at sites around the country that are
part of the Volunteer Income Tax Assistance and Tax Counseling for
the Elderly programs. 

Taxpayers who need answers to tax law questions could call IRS'
toll-free tax assistance number (which we discuss later) or IRS'
TeleTax system, which has prerecorded information on about 150
topics.  As of March 16, 1996, the number of tax law calls to TeleTax
had increased by about 10 percent over last year (4.5 million this
year compared with 4.1 million last year). 

Still another option for free assistance is IRS' World Wide Web site
on the Internet.  Among other things, IRS' site includes copies of
forms, information similar to that on TeleTax, and some interactive
scenarios that taxpayers can use to help them answer some commonly
asked questions.  IRS reported on March 18, 1996, that its World Wide
Web site had been accessed more than 25 million times since January
8, 1996. 


      QUESTIONABLE REFUND PROGRAM
------------------------------------------------ Chapter STATEMENT:2.3

IRS' primary program for detecting questionable refund claims also
absorbed staffing cuts in 1996.  According to IRS data, the 10
service centers have been allocated a total of about 379 full-time
equivalents for that program in fiscal year 1996 compared with 551
full-time equivalents in 1995--a decrease of 31 percent.  IRS
officials told us that, because of the staff reduction, program
procedures were changed in an attempt to better target the staffs'
efforts.  We do not know the initial impact of these changes because
we have not yet seen any statistics on the number of questionable
refund claims detected in 1996.  In an attempt to recoup most of
those staff reductions, IRS' budget request for fiscal year 1997
includes $21 million and 230 full-time equivalent positions for the
questionable refund detection program.  That request is part of the
revenue protection initiative discussed later. 


      ALTERNATIVE WAYS OF FILING
------------------------------------------------ Chapter STATEMENT:2.4

As of March 15, 1996, the number of individual income tax returns
filed in ways other than the traditional paper format has increased
substantially compared to the same time last year.  That is true even
though the overall number of returns filed as of March 15 was down
slightly from last year.  As shown in table 1, most of the growth in
alternative filings is due to 1040PC and TeleFile.\5



                                Table 1
                
                Individual Income Tax Returns Received,
                               1994-1996

                                     March 15,   March 17,   March 18,
Type of filing                            1996        1995        1994
----------------------------------  ----------  ----------  ----------
Traditional paper                   36,258,000  40,787,000  38,333,000
Electronic                           9,811,000   9,259,000  11,647,000
TeleFile                             2,379,000     592,000     459,000
1040PC                               2,767,000     673,000   1,723,000
======================================================================
Total                               51,215,000  51,311,000  52,162,000
----------------------------------------------------------------------
Source:  IRS' Management Information System for Top Level Executives. 

Growth in the use of 1040PC is due, in part, to the largest user
rejoining the program after dropping out in 1995.\6 The growth in
TeleFile is due primarily to its expanded availability.  It is now
available nationwide; it was only available to taxpayers in 10 states
in 1995.  IRS' budget request for fiscal year 1997 includes $7
million to allow expansion of TeleFile to other forms and taxpayers. 
Although IRS has made substantial progress in expanding the use of
TeleFile and further expansion seems logical, it is important to note
that only about 12 percent of the more than 20 million 1040EZ
taxpayers who IRS estimated would be eligible to use the system in
1996 had actually used it as of March 15.  In past reports, we have
discussed the benefits of TeleFile to taxpayers (e.g., reduced filing
time, fewer errors, and quicker refunds) and the presumed benefit to
IRS in reduced processing costs.  In addition to expanding TeleFile,
it seems that IRS could increase participation in the program by (1)
determining why many currently eligible users are not participating
and (2) taking steps to address any identified barriers to their
fuller participation. 

Last year was the first year since electronic filing started in 1986
that the number of returns received electronically decreased from the
number received the prior year.  Although the number of electronic
returns is on the rise this year compared with last, the number filed
as of March 15 was still about 16 percent fewer than the number filed
at the same time 2 years ago.  As we recommended in October 1995, if
IRS is to reach its goal of 80 million electronic returns in 2001, it
needs to (1) identify those groups of taxpayers who offer the
greatest opportunity to reduce IRS' paper processing workload and
operating costs if they were to file electronically and (2) develop
strategies that focus resources on eliminating or alleviating
impediments, such as the program's cost, that inhibit those groups
from participating.\7


--------------------
\5 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.  Under the 1040PC method, a taxpayer or tax return
preparer uses 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 or preparer has made an entry are included on the
1040PC.  Under the third alternative filing method, electronic
filing, returns are transmitted over communication lines to an IRS
service center, where they are automatically edited and processed. 

\6 For the 1995 filing season, IRS required that preparers provide
taxpayers with some type of descriptive printout or legend that
explained each line on the taxpayer's 1040PC return.  According to an
official of a private tax preparation firm that had been the largest
user of 1040PCs, the firm chose to stop participating in 1995 rather
than incur the extra cost associated with providing the legend. 

\7 Tax Administration:  Electronic Filing Falling Short of
Expectations (GAO/GGD-96-12, Oct.  31, 1995). 


      REFUND DELAYS
------------------------------------------------ Chapter STATEMENT:2.5

Last year, IRS took several steps in an attempt to better ensure that
persons were entitled to the refunds, dependents, and Earned Income
Credits they were claiming.  The most visible of those efforts
involved the delay of millions of refunds to allow IRS time to verify
SSNs and do compliance checks.  Although those efforts appeared to
have had a significant deterrent effect (e.g., preliminary
information indicates that 1.9 million fewer dependents were claimed
in 1995 than were in 1994), they were not without problems. 

IRS (1) identified many more missing, invalid, and duplicate SSNs
than it was able to pursue and ended up releasing the refunds without
resolving the problems and (2) delayed millions of refunds for
taxpayers whose returns had valid SSNs to check for duplicate SSNs
but ended up releasing those refunds after several weeks without
doing the checks.  Many taxpayers and practitioners were surprised
that IRS delayed some refunds even if all of the SSNs on the return
were good.  They were also upset that IRS split some refunds--issuing
part of the refund and delaying the rest--but only honored a
taxpayer's direct deposit request for the first part of the refund. 

As we noted in our report to the Subcommittee on the 1995 filing
season, IRS identified fewer fraudulent returns during the first 9
months of 1995 than it did during the same period in 1994, and the
percentage of fraudulent refunds it stopped before issuance
declined.\8 Neither we nor IRS know whether those decreases were due
to a decline in the incidence of fraud or a decline in the
effectiveness of IRS' detection efforts.  The Director of IRS' Office
of Refund Fraud expressed the belief that there were fewer fraudulent
returns to be identified in 1995.  He opined that the additional
controls IRS implemented in 1995 and knowledge of those actions had
deterred persons from filing fraudulent returns. 

IRS took steps this year to address some of the problems it
encountered in implementing its new procedures in 1995.  For example,
IRS has said that it is being more selective in deciding which cases
to investigate and which refunds to delay this year--trying to focus
its resources on the most egregious cases and minimize the burden on
honest taxpayers. 

Statistics on the number of notices sent to taxpayers in 1996
concerning SSN problems and refund delays indicate that IRS is indeed
delaying fewer refunds.  As of March 9, 1996, IRS had mailed about
56-percent fewer refund-delay notices than at the same time last
year.  Another indicator that fewer refunds are being delayed in 1996
is the decrease in the number of "where is my refund" calls to IRS. 
Taxpayers wanting to know the status of their refunds can call
TeleTax and get information through the use of an interactive
telephone menu.  This filing season, as of March 16, 1996, IRS
reported receiving 26.5 million such calls--a decrease of about 15
percent from the 31.0 million it reported receiving as of the same
time last year. 


--------------------
\8 We limited our comparison to the first 9 months because IRS had
not compiled data for the last quarter of 1995. 


      TELEPHONE ACCESSIBILITY
------------------------------------------------ Chapter STATEMENT:2.6

For the past several years, taxpayers have had difficulty reaching
IRS by telephone.  As we reported to the Subcommittee in December
1995, IRS data showed that (1) an estimated 46.9 million callers made
236 million call attempts to IRS for tax assistance between January 1
and April 15, 1995 and (2) IRS was able to respond to only 19.2
million of those attempts--an accessibility rate of 8 percent.\9

Accessibility has improved this year, although it is still low.  IRS
data for January 1 through March 9, 1996, showed 63.3 million call
attempts, of which 12.7 million were answered--an accessibility rate
of about 20 percent.  As of the same time last year, IRS reported
receiving about 107 million call attempts, of which 11.7 million were
answered--an accessibility rate of about 11 percent.  As the data
indicate, a major reason for the improved accessibility is the
significant drop in call attempts.  IRS attributed that drop to (1)
fewer refund delay notices being issued, as discussed earlier; (2) a
slippage in the number of returns filed; and (3) IRS efforts to
publicize other information sources, such as Internet. 


--------------------
\9 The 1995 Tax Filing Season:  IRS Performance Indicators Provide
Incomplete Information About Some Problems (GAO/GGD-96-48, Dec.  29,
1995). 


      SCRIPS
------------------------------------------------ Chapter STATEMENT:2.7

In our report to the Subcommittee on the 1995 filing season, we noted
that IRS' new document imaging system--SCRIPS--did not perform as
expected, leading to increased returns processing costs and
lower-than-expected productivity.\10 For example, SCRIPS had such
significant downtime that two of the five service centers that were
using SCRIPS stopped using it to process Forms 1040EZ.  As a result,
IRS had to redirect more of the Form 1040EZ processing workload to
its manual data entry system.  After the 1995 filing season, IRS
identified hardware and software upgrades that would be needed to
correct the SCRIPS performance problems.  IRS made some of those
changes for the 1996 filing season. 

Our discussions with IRS officials and our review of processing rate
data indicate that SCRIPS' performance has improved in 1996. 
Specifically, SCRIPS is processing at faster rates in three of the
five centers and operating with less system downtime in all five
centers.  However, the two centers that stopped using SCRIPS to
process Forms 1040EZ last year are experiencing slower processing
rates than those of last year.  Despite the improved performance,
SCRIPS is far from the level of performance IRS had originally
expected.  For example, IRS originally planned to be processing all
Forms 1040EZ on SCRIPS by 1996; it now expects to process about 50
percent of the Forms 1040EZ received in 1996 on SCRIPS.  The
remaining forms are being processed through IRS' manual data entry
system. 

Although IRS made changes to SCRIPS and performance has improved, we
are concerned that IRS did not establish more specific performance
expectations for SCRIPS this filing season.  IRS specified volume
expectations by form type, but it did not establish expectations for
improvements in processing rates or reductions in system down time
that should result from the enhancements made for the 1996 filing
season.  Without those expectations, it will be difficult for IRS to
determine which enhancements were cost beneficial.  We are currently
reviewing SCRIPS and plan to report our results later this year. 


--------------------
\10 GAO/GGD-96-48. 


   ADDITIONAL INVESTMENTS IN TSM
   ARE AT RISK GIVEN CURRENT
   MANAGERIAL AND TECHNICAL
   WEAKNESSES
-------------------------------------------------- Chapter STATEMENT:3

TSM, which began in 1986, is key to IRS' vision of a virtually
paper-free work environment in which taxpayer account updates are
rapid and taxpayer information is readily available to IRS employees
to respond to taxpayer inquiries.  IRS' fiscal year 1997 request for
TSM is $850 million, a $155 million increase from IRS' proposed
operating level for fiscal year 1996.  We continue to believe that
TSM is a high risk and are concerned about how effectively IRS can
use the requested funds until it corrects some fundamental technical
and managerial weaknesses. 

The Treasury, Postal Service and General Government Appropriations
Act for 1996 "fenced" $100 million in TSM funding until the Secretary
of the Treasury reports to the Senate and House Appropriations
Committees on IRS' progress in responding to the recommendations we
made in a July 1995 report on TSM.\11

Many of our recommendations were intended to correct critical IRS
management and technical weaknesses by December 31, 1995.  Without
these corrections, IRS will not have the sound management and
technical practices it needs to successfully meet TSM objectives in a
cost effective and expeditious manner.  A recent National Research
Council report on TSM had a similar message.\12

The Council's recommendations parallel the recommendations we made
involving IRS' (1) business strategy to reduce reliance on paper, (2)
strategic information management practices, (3) software development
capabilities, (4) technical infrastructures, and (5) organizational
controls. 

In our March 14, 1996, testimony before the Subcommittee on Treasury,
Postal Service and General Government, House Committee on
Appropriations, we assessed IRS' progress in responding to our
recommendations.\13 Because IRS' progress report on implementing our
recommendations was not finalized, our assessment was based on
several follow-up meetings with IRS officials and a review of various
planning documents.  According to the Deputy Secretary of the
Treasury, the Department is currently reviewing IRS' progress report
and plans to submit it to Congress "as soon as possible."

IRS has initiated a number of activities and made some progress in
addressing our recommendations to improve management of information
systems; enhance its software development capability; and better
define, perform, and manage TSM's technical activities.  However,
none of these steps, either individually or in the aggregate, has
fully satisfied any of our recommendations. 

As a result, we do not believe that IRS can make effective use of TSM
systems development funds at this time.  Our concern is heightened by
the fact that IRS would not give us specific information on its plans
for spending the $850 million being requested for TSM in fiscal year
1997.  IRS' budget request contains some general information on its
plans for the $155 million increase over the proposed operating level
for fiscal year 1996.  However, the information provided raises
additional concerns.  In this regard, IRS is requesting an additional
$29 million for Cyberfile, an electronic filing system.  Earlier this
week, we testified that Cyberfile is a poorly developed system that
does not adequately address the security requirements needed to
protect taxpayer data.\14


--------------------
\11 GAO/AIMD-95-156. 

\12 Continued Review of the Tax Systems Modernization of the Internal
Revenue Service--Final Report, Computer Science and
Telecommunications Board, National Research Council, 1996. 

\13 Tax Systems Modernization:  Status of Tax Systems Modernization,
Tax Delinquencies, and the Potential for Return Free Filing
(GAO/T-GGD/AIMD-96-88, Mar.  14, 1996). 

\14 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Overcome to Achieve Success (GAO/T-AIMD-96-75, Mar.  26,
1996). 


   FISCAL YEAR 1997 BUDGET REQUEST
   INCLUDES $359 MILLION FOR
   REVENUE PROTECTION INITIATIVES
-------------------------------------------------- Chapter STATEMENT:4

In every year but one from 1990 through 1995, Congress has
appropriated IRS funds for various compliance initiatives aimed at
increasing IRS' enforcement staff with the expectation that the
increase would produce more revenue.  For fiscal year 1995, Congress
appropriated $405 million for compliance initiatives.  In estimating
the revenue that would be generated from those initiatives--$9.2
billion--IRS assumed that Congress would continue to provide $405
million for the additional staffing over the next 4 years.  However,
Congress did not provide the second-year funding installment for
fiscal year 1996. 

IRS' fiscal year 1997 budget request includes $359 million for
"revenue protection initiatives".  Although the name has changed,
these initiatives are directed toward achieving the same goal as were
previous compliance initiatives--to increase revenue.  To help
Congress deliberate on this portion of IRS' budget request, you asked
that we summarize our past work on compliance initiatives.  That work
focused on the following issues: 

  Before fiscal year 1995, IRS consistently used at least some of the
     compliance initiative funds for purposes other than those that
     Congress intended.  Specifically, IRS used these funds to cover
     budget shortfalls in base operations.  As a result, many of the
     past compliance initiatives were never fully implemented.  To
     ensure that IRS spent fiscal year 1995 compliance initiative
     funds as intended, the Appropriation Committees restricted IRS'
     ability to use those funds for other purposes. 

  Before fiscal year 1995, IRS only tracked the staffing and revenue
     associated with an initiative.  Using this approach, IRS could
     claim that compliance initiatives had met their revenue goal
     even if IRS' base staffing had declined, which was often the
     case.  We recommended that IRS provide Congress with information
     on the total revenue achieved--from both base staffing and
     compliance initiative staffing--to ensure that Congress had a
     more accurate picture of IRS' total compliance program.\15 IRS
     revised its tracking approach for fiscal year 1995. 

  Although IRS revised its tracking approach, we cannot yet comment
     on the accuracy of the revenue figures in IRS' tracking reports. 
     Until recently, IRS had to estimate the amount of revenue
     derived from its compliance efforts because it was unable to
     track actual revenue--regardless of whether it was generated
     from compliance initiative staff or base staff.  For the last
     several years, IRS has been implementing an Enforcement Revenue
     Information System (ERIS) that is intended to report the actual
     revenue from various compliance programs.  In the past, we have
     discussed concerns about the reliability of ERIS data, and IRS
     has been working to resolve those problems.  We plan to test the
     reliability of ERIS data as part of our audit of IRS' fiscal
     year 1996 financial statements. 

  Although we generally supported the fiscal year 1995 compliance
     initiatives, we did not support hiring more revenue officers. 
     For several years, we have encouraged IRS to shift its
     collection focus from revenue officers, who generally collect
     delinquent taxes through face-to-face contact with taxpayers, to
     more productive processes like ACS, that emphasize early
     telephone contact.  Although IRS subsequently reduced the number
     of revenue officers for that initiative, it still planned to
     hire about 750 in fiscal year 1995.  As noted earlier, IRS is
     now diverting some revenue officers --who are paid at higher
     rates than ACS staff--to ACS to mitigate the impact of ACS
     staffing reductions. 

The $359 million included in IRS' fiscal year budget request for the
revenue protection initiatives is expected to fund 3,820 additional
compliance staff.  According to IRS, most of those staff are for
areas, such as ACS and Document Matching, that were significantly
affected by fiscal year 1996 staffing cuts. 

Despite the 3,820 additional staff associated with the revenue
protection initiatives, IRS budget shows that total compliance
staffing is expected to increase by only 2,390 positions in fiscal
year 1997.  Almost all of that difference is because IRS' budget also
includes a decrease of 1,341 full-time equivalents for tax law
enforcement.  That decrease is part of IRS' contribution to
reductions in base programs to reduce the federal deficit.  According
to IRS, the decrease of 1,341 positions will come from the more
traditional enforcement job categories--those, such as revenue
officers and revenue agents, that engage in face-to-face audit and
collection activities.  IRS' budget states that although "these
positions still comprise the lion's share of IRS enforcement efforts,
they also represent, on the margin, the least efficient use of IRS
resources." According to IRS officials, these staff reductions will
be achieved through attrition. 

Thus, one effect of the increases and decreases in IRS' compliance
staffing for fiscal year 1997, if IRS' budget request is approved and
is implemented as IRS has described, would be to alter the mix of
that staffing.  IRS would have fewer revenue officers, for example,
and more ACS staff--the kind of mix that we have advocated in the
past. 

In conclusion, although IRS has made some changes, there are certain
questions that remain appropriate in discussing the revenue
protection initiatives:  (1) will IRS spend the additional funds for
additional compliance staff?  (2) does IRS have reliable data on the
revenue generated by its enforcement activities?  and (3) will IRS be
able to achieve the new staffing mix? 


--------------------
\15 Tax Administration:  Congress Needs More Information on
Compliance Initiative Results (GAO/GGD-92-118, July 31, 1992). 


------------------------------------------------ Chapter STATEMENT:4.1

That concludes my statement.  We welcome any questions that you may
have. 


FACTORS AFFECTING ACS STAFFING FOR
FISCAL YEAR 1996
==================================================== Appendix Appendix

Factors surrounding IRS' organizational and business restructuring
led to ACS having a large number of seasonal, term and other than
full-time permanent staff at the end of fiscal year 1995.  As a
result, ACS was targeted for a significant staff reduction given IRS'
cost-cutting approach for fiscal year 1996. 

IRS' customer service vision calls for combining into 23 customer
service sites the work of at least 70 organizational units that
employ staff who do not have face-to-face interactions with
taxpayers.  These centers are to employ staff who will work primarily
by telephone to assist taxpayers, collect delinquent taxes, and
adjust taxpayer accounts.  As part of this consolidation, IRS is to
close 10 of its 20 ACS sites. 

After IRS announced which 10 sites would be closed, two things
happened.  First, ACS employees who could find other positions left
ACS.  Some of these employees were hired for revenue officer
positions that became available as part of the fiscal year 1995
compliance initiatives.  Second, the 10 ACS sites that were scheduled
to close could hire only term and seasonal staff, according to an IRS
official.  Therefore, at the end of fiscal year 1995, ACS had 448
seasonal, term, and other than full-time permanent staff--66 percent
higher than the number at the end of fiscal year 1994. 


*** End of document. ***