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entitled 'Internal Revenue Service: Interim Results of the 2007 Tax 
Filing Season and the Fiscal Year 2008 Budget Request' which was 
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Report to the Ranking Minority Member, Subcommittee on Oversight, 
Committee on Ways and Means, House of Representatives: 

United States Government Accountability Office: 

GAO: 

April 2007: 

Internal Revenue Service: 

Interim Results of the 2007 Tax Filing Season and the Fiscal Year 2008 
Budget Request: 

GAO-07-673: 

GAO Highlights: 

Highlights of GAO-07-673, a report to the Ranking Minority Member, 
Subcommittee on Oversight, Committee on Ways and Means, House of 
Representatives 

Why GAO Did This Study: 

The Internal Revenue Serviceís (IRS) tax filing season performance is a 
key indicator of how well IRS serves taxpayers. This yearís filing 
season was expected to be risky because of tax system changes, 
including the telephone excise tax refund (TETR). IRSís fiscal year 
(FY) 2008 budget request shows its spending proposal for taxpayer 
service, enforcement, and Business Systems Modernization (BSM). The 
request includes initiatives to reduce the tax gap, the difference 
between what taxpayers owe and what they voluntarily pay on time. IRS 
recently estimated the net tax gap to be $290 billion in 2001. GAO was 
asked to (1) describe IRSís 2007 filing season performance, (2) 
determine how IRS's proposed FY 2008 budget compares to prior years', 
provides information on how proposals may impact the tax gap, justifies 
new spending, and whether there are opportunities to reduce or 
reallocate resources, and (3) evaluate the status of IRSís efforts to 
develop and implement BSM. 

What GAO Found: 

Despite initial concerns about this yearís filing season being high 
risk due to increased workload from TETR and other tax system changes, 
early data suggest that the impact has been minimal because anticipated 
volume has not materialized. IRS has processed over 63 million returns, 
most filed electronically. However, one of IRSís key tax return 
processing systems became operational two months behind schedule, 
resulting in slower posting of returns and delayed refunds for several 
days for millions of taxpayers. 

IRSís 2008 budget request of $11.6 billion would increase spending by 
5.6 percent and continue a trend since 2004 of shifting overall 
spending toward enforcement. The proposed budget provides limited 
information on the impact of proposed initiatives on the tax gap. 
Expected direct enforcement revenue to be gained is smallóless than 1 
percent of the net tax gap. The indirect effect of the initiatives on 
voluntary compliance is unknown although some research suggests that 
the indirect effect might be larger than the direct effect. Further, 
justifications for selected taxpayer service and enforcement 
initiatives varied. While documents for some initiatives had useful 
detail for assessing them, others lacked this information. For example, 
the initiative to determine the impact of taxpayer service on 
compliance lacked details such as a problem statement, a research 
approach, and how IRS determined needed resources. While GAO has been 
supportive of this kind of research, without a more detailed 
justification GAO cannot comment on specifics of the proposal. GAO is 
continuing to assess the justifications. IRS may be able to deliver 
taxpayer service more cost effectively, but its study of taxpayer 
service delivery options is several months behind schedule; in March 
2007, the IRS Commissioner testified that the report will be issued 
soon. 

Despite progress made in implementing BSM projects and improving 
modernization management controls and capabilities, significant 
challenges and serious risks remain, and IRS has more to do to fully 
address our prior recommendations. 

Figure: Funding for IRS Enforcement and Taxpayer Service Programs and 
Related Support Functions, Fiscal Years (FY) 2004-2008: 

[See PDF for Image] 

Source: GAO analysis of IS data. 

[End of figure] 

What GAO Recommends: 

GAO is not making any new recommendations, but notes relevant past 
recommendations, their implementation status, and where our previous 
work has identified opportunities for additional savings. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-673]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact James R. White at (202) 
512-9110 or whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Scope and Methodology: 

Agency Comments: 

Appendix I: Updated Briefing Slides from the March 15, 2007, briefing 
to the Subcommittee on Oversight, House Committee on Ways and Means: 

Appendix II: GAO Contact and Staff Acknowledgments: 

United States Government Accountability Office: 
Washington, DC 20548: 

April 3, 2007: 

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

Dear Mr. Ramstad: 

Effective tax administration requires a balance of taxpayer service and 
tax law enforcement. To provide enforcement and taxpayer service in 
fiscal year (FY) 2008, the Internal Revenue Service (IRS) has requested 
an $11.6 billion[Footnote 1] operating level budget with about 63 
percent going for enforcement activities and 31 percent for taxpayer 
service (including operational support). The remaining request includes 
funding to develop and implement modernized information systems. 

IRS provides much of its services to taxpayers during the annual tax 
return filing season, making filing season performance a key indicator 
of how well IRS is serving taxpayers. In past reports and testimonies, 
we said that IRS has made significant progress improving taxpayer 
service since passage of the IRS Restructuring and Reform Act of 1998 
(RRA 98).[Footnote 2] Improvements include increased electronic filing, 
better access to IRS's telephone assistors, and more accurate answers 
to taxpayers' questions. However, we have also described taxpayer 
service challenges such as the quality of assistance at walk-in and 
volunteer sites where taxpayers get face-to-face assistance. Moreover, 
the Commissioner of Internal Revenue stated that this year's filing 
season is high risk for several reasons, including challenges in 
implementing the new telephone excise tax refund (TETR), split refund 
option (refunds can now be directly deposited to up to three separate 
accounts), and several tax law extensions that passed late in 2006. 

Although IRS has increased revenue collected through its enforcement 
programs in recent years, enforcement continues to be included on our 
list of high-risk federal programs.[Footnote 3] This is due, in part, 
to the persistence of a large tax gap.[Footnote 4] IRS estimated the 
gross tax gap to be $345 billion for tax year 2001. After late payments 
by taxpayers and revenue brought in by IRS's enforcement efforts, the 
resulting net tax gap is estimated to be $290 billion. 

Another high-risk challenge is IRS's ongoing Business Systems 
Modernization (BSM) program, a multibillion-dollar, highly complex 
effort that involves the development and delivery of a number of 
modernized information systems that are intended to replace the 
agency's aging business and tax processing systems. The program is 
critical to supporting IRS's taxpayer service and enforcement goals and 
reducing the tax gap. We recently reported that despite progress made 
in implementing BSM projects and improving modernization management 
controls and capabilities, significant challenges and serious risks 
remain, and further program improvements are needed, which IRS is 
working to address.[Footnote 5] 

In light of the challenges IRS faces, you asked us to assess IRS's 2007 
tax filing season performance, FY 2008 budget request, and the status 
of the BSM program. Our objectives were to (1) describe IRS's 2007 tax 
filing season performance for returns processing and taxpayer 
assistance including the impact of tax system changes, such as the 
TETR, split refund option, and several tax law extensions that passed 
late in 2006, (2) assess IRS's proposed FY 2008 budget and compare it 
with prior years' spending and staffing and determine what information 
it provides on the impact of proposals on the tax gap, how new spending 
initiatives are justified, and whether there are opportunities to 
reduce or reallocate resources, and (3) evaluate the status of IRS's 
efforts to develop and implement BSM. 

On March 15, 2007, we briefed your staff and staff of the Subcommittee 
Chair on the preliminary observations of our review. This report 
transmits the updated materials we used at the briefing, which are 
reprinted as appendix I. 

In summary, we made the following major points: 

* Despite initial concerns and IRS's characterization of this year's 
filing season as high risk, early data show that tax systems changes 
have not had a significant effect on filing season operations or 
performance. In particular, TETR-related requests and telephone calls 
have been far less than IRS planned. As of March 16, 2007, IRS has 
processed 63.5 million individual income tax returns, with 69 percent 
including TETR requests. The number of returns filed electronically is 
5 percent greater than this time last year. Also, IRS is achieving its 
goals for telephone service. However, there are areas of concern. In 
early March, the latest release of the Customer Account Data Engine 
(CADE), one of IRS's key tax return processing systems, became 
operational--2 months behind schedule. As a result of the delay, IRS 
has had slower processing times and delayed refunds for up to several 
days for millions of taxpayers. This delay may have a more serious 
impact on IRS's ability to deliver future releases of CADE, because it 
caused contention for key resources, but it is too early to know. 
Taxpayers' use of the Free File program (an alliance of companies that 
offer free return preparation and electronic filing on their Web sites 
to eligible taxpayers) is 5.5 percent below last year at this time. 

* IRS's 2008 budget request would increase spending, particularly for 
enforcement. The $11.6 billion requested total operating budget is an 
increase of $608.8 million (5.6 percent) over the FY 2007 continuing 
resolution level. IRS proposes spending $7.2 billion for enforcement 
(including operational support), an increase of 6.5 percent, continuing 
a trend since 2004 of shifting a greater proportion of overall spending 
toward enforcement as compared to taxpayer service. IRS's budget 
request includes initiatives and legislative proposals to address the 
tax gap. There is limited data in IRS's request on the expected impact 
of the proposals on the gap. The expected direct enforcement revenue to 
be gained is small compared to the size of the tax gap. For example, 
IRS expects to yield about $699 million in FY 2010, or about ľ of 1 
percent of the tax year 2001 net tax gap from additional enforcement 
staffing. However, the indirect effect on voluntary compliance is 
unknown. Several research studies by economists, while subject to data 
limitations, suggest that indirect revenue might exceed direct revenues 
gained. We asked for supplementary documents on six initiatives to 
better understand their expected benefits and costs. The documented 
justifications for those initiatives varied in the depth of useful 
information they provided. We continue to assess the justifications for 
the initiatives and whether IRS could cost effectively provide 
additional information that could be useful for the Congress and others 
as they assess IRS's budget request. IRS identified savings in the 2008 
budget request, but other savings opportunities may exist. For example, 
IRS may be able to change the mix of services provided--such as giving 
taxpayers more options for help by e-mail or its Web site in place of 
more costly telephone or walk-in operations--but its study to identify 
cost-effective service delivery methods is several months behind 
schedule. 

* IRS continues to make progress in implementing BSM projects and 
meeting cost and schedule commitments, but two key projects--CADE 
(discussed above) and Modernized e-File (a new electronic filing 
system)--experienced significant cost overruns during 2006. Future BSM 
project releases face serious risks, which IRS is working to mitigate. 
For example, delays in deploying the latest release of CADE have 
resulted in contention for key resources and will likely impact the 
design and development of the next two important releases, which are 
scheduled to be deployed later this year. IRS has made significant 
progress in implementing our prior recommendations and improving its 
modernization management controls and capabilities. However, critical 
controls and capabilities related to requirements development and 
management and post implementation reviews of deployed BSM projects 
have not yet been fully implemented. In addition, more work remains to 
be done by the agency to fully develop a long-term vision and strategy 
for completing the BSM program, including establishing time frames for 
consolidating and retiring legacy systems. 

Scope and Methodology: 

To assess IRS's filing season performance for processing, telephones, 
face-to-face assistance and its Internet Web site, we obtained and 
analyzed IRS's performance and production data and compared it to 
annual goals and prior years' performance. Our work also included 
direct observations of key filing season operations, and interviews 
with IRS officials and other external stakeholders. 

To assess IRS's 2008 budget request, we reviewed IRS's congressional 
budget justifications and supplementary documents to (1) identify 
trends in spending and staffing from FYs 2004 through 2008, (2) assess 
information on the tax gap and selected spending initiatives to assess 
the information provided to justify the request, and (3) identify areas 
of potential opportunities for savings and efficiencies. Our assessment 
is based on a comparative analysis funding, expenditures, and other 
documentation and interviews with IRS officials. 

Our filing season and budget audit work was done primarily at IRS's 
National Office and its operating divisions including the Large and Mid-
Size Business operating division in Washington, D.C; Small 
Business/Self-Employed operating division in New Carrollton, Md; and 
Wage and Investment Division operating division headquarters and Joint 
Operations Center and call site in Atlanta, Ga. We also interviewed 
officials at the IRS Oversight Board in Washington, D.C. Additionally, 
we reviewed relevant external documentation and our reports and reports 
of the Treasury Inspector General for Tax Administration. 

Our analysis of the BSM program was based primarily upon the results of 
our detailed review of the FY 2007 BSM expenditure plan that we issued 
in a recent report.[Footnote 6] 

In past work, we assessed IRS's budget and filing season performance 
data. We considered filing season performance measures and data that 
cover the quality, accessibility, and timeliness of IRS's services to 
be objective and reliable based on our prior work. Since the data 
sources and procedures for producing this year's budget and filing 
season data have not significantly changed from prior years, we 
determined that the data were sufficiently reliable for the purposes of 
this report. To the extent possible, we corroborated information from 
interviews with documentation and data and where not possible, we 
report the information as attributed to IRS officials. We have 
determined that the estimates for cost savings and Web site performance 
come from competent sources and are reasonable. Data limitations are 
discussed where appropriate. We performed our work from December 2006 
through March 2007 in accordance with generally accepted government 
auditing standards. 

Agency Comments: 

In commenting on a draft of this report, IRS officials emphasized that 
the budget's initiatives and legislative proposals will result in 
additional direct and indirect revenue and, ultimately, increase 
compliance. It also reported that it will soon release its strategic 
plan for taxpayer service delivery, which will serve as the foundation 
for future decisions for service improvements and efficiencies. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of other Senate and House committees and subcommittees 
that have appropriation, authorization, and oversight responsibilities 
for the IRS. We are also sending copies to the Commissioner of Internal 
Revenue, the Secretary of the Treasury, the Chairman of the IRS 
Oversight Board, and the Director of the Office of Management and 
Budget. Copies are also available at no charge on the GAO Web site at 
http://www.gao.gov. 

If you or you staff have any questions or wish to discuss the material 
in this briefing further, please call me at (202) 512-9110 or at 
whitej@gao.gov. Contact points for our offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in Appendix II. 

Sincerely yours, 

Signed by: 

James R. White: 
Director, Tax Issues Strategic Issues Team: 

[End of section] 

Appendix I: Updated Briefing Slides from the March 15, 2007, briefing 
to the Subcommittee on Oversight, House Committee on Ways and Means: 

Interim Results of IRS's 2007 Tax Filing Season Performance and Fiscal 
Year 2008 Budget Request: 

Update of March 15, 2007 Briefing To the Subcommittee on Oversight, 
House Committee on Ways and Means: 

Review Objectives: 

What is IRS's 2007 filing season performance for returns processing and 
taxpayer assistance including impacts of tax system changes, such as 
the telephone excise tax refund (TETR), split refund option (refunds 
can be directly deposited to up to three separate accounts), and 
several tax law extensions that passed late in 2006? 

How does IRS's proposed FY 2008 budget compare with prior years' 
spending and staffing and what information does it provide on how 
proposals may impact the tax gap, how new spending initiatives are 
justified, and opportunities to reduce or reallocate resources? 

What is the status of IRS's efforts to develop and implement its 
Business Systems Modernization (BSM) program? 

Background: 

IRS's primary filing season operations include processing electronic 
and paper individual income ax returns and issuing refunds as well-as 
providing taxpayer service through its toll-free telephone operations, 
Web site, and face-to-face assistance. 

* Taxpayers can electronically file their returns by using a paid tax 
preparer, commercial tax preparation software, or the Free File 
program. The Free File program, accessible through IRS's Web site, is 
an alliance of 20 companies that have an a agreement with IRS to 
provide free on-line tax preparation and electronic filing on their Web 
sites for taxpayers below an adjusted gross income ceiling ($52,000 in 
2000. 

While it is always a massive undertaking, the IRS Commissioner 
characterized this ear's filing season as high risk for three reasons: 
the TETR, split refund option, and tax law extender provisions. 

* IRS estimated that over 180 million individuals and businesses are 
eligible for the TETR. Individuals businesses, and tax-exempt 
organizations that paid the excise tax on long-distance telephone 
service after February 28, 2003 and before August 1, 2006 are eligible 
to request the refund. Individuals who do not have tax filing 
obligations, but paid the tax, can request the refund on Form 1040EZ-T 
(Request for Refund of Federal Telephone Excise tax). 

* Individuals can request a standard TETR amount ranging from $30 to 
$60 depending on the number of exemptions they are eligible or they can 
use Form 8913 (Credit for Federal Telephone Excise Tax Paid) to claim 
the tax paid. 

* Taxpayers have 3 years to file an amended tax return to request TETR. 
Individuals who have no tax filing obligation can file a 1040 EZ-T 
within 3 years to request TETR without filing an extension. 

Prior to the 2007 filing season, taxpayers could have their refunds 
directly deposited into one account. Beginning in 2007, to encourage 
savings, taxpayers are allowed to directly deposit their refunds into 
up to three accounts. 

The Tax Relief and Health Care Act of 2006 signed into law in December 
2006 extended some provisions that expired at the end of calendar year 
2005. These changes include extensions of three tax deductions: (1) 
state and local sales tax, (2) higher education tuition and fees, and 
(3) educator expenses. 

The most recent (tax year 2001) estimated gross tax gap-the difference 
between what taxpayers pay voluntarily and on time and what they should 
pay under the law-is 345 billion. IRS estimated that it would recover 
$55 billion of the 2001 tax gap through late payments and enforcement 
actions, leaving a net tax gap of $290 billion. 

IRS's BSM program is a multibillion-dollar, high-risk, highly complex 
effort to develop and deliver modernized information systems that are 
intended to replace the agency's aging business and tax processing 
systems. The program is critical to supporting IRS's taxpayer service 
and enforcement goals and reducing the tax gap. 

IRS's new tax return processing system, the Customer Account Data 
Engine (CADE), is the cornerstone of IRS's modernization efforts. CADE 
is being introduced through a series of releases and is intended to 
fully replace IRS's antiquated Individual Master File system of 
taxpayer accounts by 2012. 

Interim Results of IRS's 2007 Filing Season - Returns Processing: 

The volume of returns processing and refund issuance is comparable to 
last year. 

According to IRS data, as of March 16, 2007, compared to the same time 
last year IRS: 

processed 63.5 million returns compared to 62.7 million returns, and: 

issued 55.2 million refunds for $139.3 billion compared to 56.3 million 
refunds for $134.0 billion. 

According to IRS officials, the agency is meeting most processing goals 
and performance is comparable to last year. 

The growth rates for electronic filing and direct deposits are up from 
the same period last year. 

As of March 16, 

Over 77 percent of all individual income tax returns or 49.3 million 
were filed electronically, up 5.3 percent over the same time last year, 
an increase over the previous years' growth of 2.2 percent, and: 

76.2 percent of refunds were directly deposited into taxpayers' 
accounts, up 5.8 percent over the same time last year. Direct deposits 
are faster and more convenient for taxpayers than mailing paper checks. 

We previously reported that state mandates for electronic filing of 
state tax returns also encourage electronic filing of both state and 
federal tax returns.[Footnote 7] Last year, electronic filing of 
federal returns increased 27 percent for the three states (NY, CT & UT) 
with new 2006 mandates. This year, state mandates are likely to 
continue to show a positive effect on federal electronic filing 
because, with the addition of West Virginia, 13 states now have state 
mandates. 

Compared to processing paper returns, electronic filing: 

reduces IRS's costs by reducing staff devoted to processing. In 2006, 
IRS used almost 1,700 (36 percent) fewer staff years for processing tax 
returns than in 1999, which IRS estimates to have saved the agency $78 
million in salary, benefits, and overtime, and: 

improves service to taxpayers, not only by a more accurate return, but 
also by a faster refund: 

As electronic filing grows, resources devoted to processing continue to 
decline. 

Figure 1: Number of Individual Returns and IRS Staff Years for 
Individual Paper and Electronic Processing, FYs 1999 - 2008: 

[See PDF for Image] 

Source: GAO analysis of IRS data. 

Notes: Staff years and FTEs are units of measurement that are often 
used interchangeably. An FTE is the equivalent of one person working 
full-time for 1 year with no overtime. As noted in the figure, staff 
years for paper filing are for selected major activities only. Also, 
2007 projections do not include 1040EZ-T. 

[End of figure] 

Early data show that the tax system changes have not had a significant 
impact on returns processing operations because the volume IRS 
anticipated has not materialized. 

As it does every filing season, IRS planned and prepared extensively 
for tax system changes which minimized problems. 

IRS anticipated a significant volume of TETR claims to process, which 
IRS has not received to date. While all taxpayers who paid the tax are 
eligible, of those who filed as of March 10, 68.7 percent have claimed 
TETR. Additionally of those who do not otherwise have tax obligations, 
approximately 312,000 have asked for a refund (2.5 percent of the 12.4 
million IRS expected by this time). Both IRS's CADE and legacy systems 
are processing TETR requests made on the 1040 and 1040EZ-T forms. 

IRS also anticipated an increased workload from split refunds that has 
not yet materialized. As of March 24, about 61,00 taxpayers, out of the 
3.8 million IRS expected for the filing season, chose the slit refund 
option to directly deposit their refund in more than one account. 
According to IRS, split refunds cost more to process, reducing the 
agency's savings from direct deposit. Further, two large tax software 
packages do not offer split refunds. 

IRS delayed processing a small number of returns (compared to total 
filing population) claiming tax extender provisions until February 3 
until it completed changes to its tax processing systems to accommodate 
the provisions. 

The latest release of CADE became operational in early March 2 months 
behind schedule because of problems identified during testing. IRS had 
on initially planned to post 33 million taxpayer returns to CADE. 
However, as a result of the delay of that release of CADE, 

IRS estimates that CADE will post about 12.5 million fewer returns. 
Thus, returns processing has been slowed for millions of taxpayers who 
would have been eligible for their returns to be posted on CADE, 
because of the longer posting times for the legacy system versus CADE, 
and: 

refunds for millions of those CADE-eligible taxpayers were delayed by 1-
5 days for direct deposit and 4-8 days for paper checks. 

The setback may have a more serious impact on IRS's ability to deliver 
expanded functionality of future versions of CADS, thus delaying the 
transition to the new processing system (discussed further in the BSM 
section of this briefing). 

IRS did not plan to process returns with split refunds on CADE this 
year because of IRS's concerns about having enough time to complete the 
programming for the current release of CADE after passage of the 
legislation. 

IRS made several changes in the Free File program: 

IRS and the Free File Alliance agreed to provide services to taxpayers 
with an average gross income of $52,000 or less which equates to about 
95 million or 70 percent of all taxpayers. Under the agreement, 
companies are not allowed to offer refund anticipation loans and 
checks, or other ancillary products to free file participants. 

While all 19 companies participation in the free file program allow for 
TETR requests, 3 of the 19 companies offer form 1040 EZ-T requests. 

Taxpayers' use of the Free File program continues to decline: 

As of March 8, 2.5 million returns were filed via free file (down 5.5 
percent from the same time last year). As of March 10, just under half 
requested TETR. 

Interim Results of IRS's 2007 Filing Season - Telephone Assistance: 

Call volume to IRS's toll free assistance is less than planned and last 
year's volume. 

Table 1: IRS Telephone Assistance Volume in the First Weeks of the 
Filing Seasons, 2006 and 2007: 

Telephone assistance: Total calls[B]; 
2006 Actual: 19,201,258; 
2007 Actual: 18,460,273; 
2007 Plan[A]: 20,584,114. 

Telephone assistance: Answered by IRS assistors (percentage); 
2006 Actual: 7,677,406 (40.0%); 
2007 Actual: 7,474,521 (40.5%); 
2007 Plan[A]: 8,182,026 (39.7%). 

Telephone assistance: Answered by automated menu of recordings 
(percentage); 
2006 Actual: 11,523,852 (60.0%); 
2007 Actual: 10,985,752 (59.5%); 
2007 Plan[A]: 12,402,088 (60.3%). 

Source: GAO analysis of IRS data. 

[A] 2007 plan is IRS's year-to-date plan to monitor performance toward 
annual goals. 

[B] Total calls (i.e., calls answered by assistors and automation) are 
based on actual counts from January 1 to March 4, 2006 and March 3, 
2007. 

[End of table] 

The assistor level of service peaked in 2003 at 87 percent. This year, 
IRS is meeting its goals, including for assistor level of service, but 
goals are lower than last year's actual performance. 

Table 2: IRS Telephone Assistance Performance in the First Weeks of the 
Filing Seasons, 2006 and 2007: 

Telephone Performance-access: Assistor level of service[B,C]; 
2006 Actual: 83.8%; 
2007 Actual: 82.4%; 
2007 Plan[A]: 81.1%. 

Telephone Performance-access: Average speed of answer (in 
minutes)[C,D]; 
2006 Actual: 3.1; 
2007 Actual: 4.4; 
2007 Plan[A]: 4.6. 

Telephone Performance-access: Taxpayer disconnects [C,E]; 
2006 Actual: 9.0%; 
2007 Actual: 12.7%; 
2007 Plan[A]: 14.7%. 

Telephone Performance-access: IRS disconnects[F]; 
2006 Actual: 462,303; 
2007 Actual: 137,926; 
2007 Plan[A]: N/A. 

Telephone Performance-accuracy[G]: Accounts customer accuracy rate 
estimates[H]; 
2006 Actual: 92.7% +/- 0.7%; 
2007 Actual: 92.9% +/- 0.9%; 
2007 Plan[A]: N/A. 

Telephone Performance-accuracy[G]: Tax law accuracy rate estimates[H]; 
2006 Actual: 90.2% +/- 1.0%; 
2007 Actual: 88.7% +/- 1.5%; 
2007 Plan[A]: N/A. 

Source: GAO analysis of IRS. 

Note: N/A means that IRS did not set goals for these measures. 

[A] 2007 plan is IRS's year-to-date plan to monitor performance toward 
annual goals. 

[B] Assistor level of service is the percentage of taxpayers who wanted 
to talk with an assistor and actually go through and received service. 

[C] Assistor level of service, average speed of answer, and taxpayer 
disconnects are based on actual counts from January 1 to March 4, 2006 
and March 3, 2007. 

[D] The number of minutes a taxpayer waits in a queue to speak with an 
assistor. 

[E] When a taxpayer hangs up before receiving assistance. 

[F] An IRS disconnect occurs when IRS disconnects callers due to long 
wait times. Based on actual counts for January 1 through March 4, 2006 
and March 3, 2007. 

[G] Based on a representative sample estimated at the 90 percent 
confidence interval for January and February 2006 and 2007. 

[H] The percentage of calls in which telephone assistors provided 
accurate answers for the call type and took the appropriate action. 

[End of table] 

Tax systems changes have had minimal impact on IRS's telephone 
operations. 

TETR-related calls are a small fraction of what IRS expected. Of the 
6.8 million TETR-related calls IRS expected between January 1 and March 
3, it received over 326,000 calls (or 4.8 percent) for TETR 
assistance.[Footnote 8] TETR-related calls were 1.8 percent of total 
calls received by IRS to date. 

IRS prepared for TETR by hiring about 650 FTEs with the expectation 
that those hires would be used to cover anticipate attrition in 2008 
and trained to handle account calls and paper inventory should the 
demand for TETR not materialize. Because TETR call volume has not 
materialized, TETR hires are allowing IRS to focus more on processing 
paper correspondence, such as amended returns, at call sites. 

For split refunds, IRS anticipated about 7,000 calls (compared to the 
70 million total calls it receives each year). 

For tax provision extenders, IRS anticipated that the affected 
taxpayers would be a small portion of total taxpayers and determined 
questions on extenders would be a part of general tax law calls. 

IRS has surplus space at call sites and is reviewing options for 
reducing excess capacity. 

Last year, IRS determined that because of excess capacity, it has the 
potential to close several call sites without negatively affecting 
taxpayer service even at peak times, but had no plans to do so. As a 
result, we recommended that IRS plan to consolidate call sites. 

IRS is reviewing the feasibility and costs of different options to 
decrease excess capacity should issue a report in FY 2008. 

Interim Results of IRS's 2007 Filing Season - IRS's Web Site 
Assistance: 

Use of IRS's Web site increased during initial filing season months 
compared to last year and data show that the site is performing well. 

Table 3: IRS Web Site Use in the First Weeks of the Filing Seasons, 
2006 and 2007: 

Uses: Visits[A]; 
2006: 66,571,225; 
2007: 72,978,709; 
Percentage change: 9.6%. 

Uses: Downloads[A]; 
2006: 21,609,956; 
2007: 24,429,718; 
Percentage change: 13.0%. 

Uses: Searches[A]; 
2006: 35,917,428; 
2007: 41,434,606; 
Percentage change: 15.4%. 

Uses: Where's My Refund[B]; 
2006: 17,732,356; 
2007: 21,656,492; 
Percentage change: 22.1%. 

Source: GAO analysis of IRS data. 

[A] Web site visits and searches and downloads from January and 
February 2006 and 2007. Downloads are from January 2006 and 2007. A 
visit begins when a visitor views their first page from the server 
IRS.gov, and ends when the visitor leaves the site. Visits are not 
counts of the numbers of unique individuals who have accessed the site. 

[B] For January 1 through March 11, 2006 and March 10, 2007. 

[End of table] 

According to independent evaluations, such as Keynote and the American 
Consumer Satisfaction Index, IRS's Web site is scoring high compared to 
other government agencies, non-profits, and private sector firms for 
customer satisfaction and compared to other government agencies for 
average download time. 

IRS added a state deduction calculator feature this filing season, 
which IRS wants to use as a new standard for other on line calculators. 

Interim Results of IRS's 2007 Filing Season - Face-to-face Assistance: 

Taxpayers are using IRS's walk-in sites less and using volunteer site 
return preparation services more. 

As of March 10, the total taxpayer contacts at IRS's 401 walk-in sites 
declined to 1.8 million (down 4.7 percent) from the same period last 
year. IRS has devoted 9 percent fewer FTEs compared to last year for 
walk-in assistance (down from 176 to 160 FTEs). IRS continues to limit 
return preparation by setting income limits that approximate the amount 
for claiming the Earned Income Tax Credit (less than $39,000) and in 
some cases, requiring appointments as it has done since 2003. IRS has 
prepared about 6,700 (5.3 percent) of the over 126,000 1040EZ-T forms 
it expected to be prepared at the sites. 

As of March 11, the number of returns prepared at over 11,700 volunteer 
sites has increased to just over 1.3 million returns (up over 8 
percent), including 33,600 1040EZ-T forms. IRS did not develop 1040EZ-T 
projections for volunteer sites. 

We and the Treasury Inspector General For Tax Administration (TIGTA) 
have raised concerns about the quality of assistance at walk-in and 
volunteer sites for years.[Footnote 9] 

* For IRS's walk-in sites, as of March 10, tax law and accounts 
assistance accuracy rates were 74 and 85 percent respectively as 
measured by IRS. IRS's goal for tax law accuracy is 78 percent. In 
2007, IRS is collecting data to set a goal for accounts accuracy for 
2008. IRS prepared over 125 000 returns and schedule at walk-in sites, 
but it lacks information on the accuracy of that assistance. 

* For volunteer sites, IRS is conducting several types of reviews. As 
of March 2, for a small non-statistical sample IRS is re reporting a 69 
percent accuracy rate for return preparation, compared to the goal of 
55 percent. In contrast, TIGTA's results, using similar methods, show a 
60 percent accuracy rate. Available IRS and TIGTA data is limited, not 
statistically based, and therefore cannot be projected to all sites. 

IRS's FY 2008 Budget Request: 

Requested funding would increase spending particularly for enforcement. 

IRS is requesting $11.6 billion total program operating level for FY 
2008, an increase of $608.8 million or 5.5 percent over the FY 2007 
continuing resolution level and 11 percent over the FY 2004 enacted 
level.[Footnote 10] 

* When adjusted for inflation, requested 2008 funding would be a 0.5 
percent increase since 2004. 

* IRS plans to spend a total of $7.2 billion for enforcement and $3.6 
billion for tax payer service (increases of 6.5 and 3.8 percent 
respectively over the 2007 continuing resolution levels) and Continuing 
a trend since 2004 of shifting the portion of overall spending toward 
en enforcement as compared to service, as shown in figure 2. 

* The, request would provide over 56,500 FTEs for enforcement and about 
35,200 FTEs for taxpayer service (an increase of 0.7 percent and a 
decrease of 3.74 percent, respectively, compared to the FY 2007 enacted 
levels).[Footnote 11] 

* At FY 2008 requested levels, since 2004, total spending for 
enforcement would increase by 19.4 percent while spending for service 
would decrease by 3.8 percent. 

* IRS proposes to fund 92,814 FTEs, a 0.29 percent decrease compared to 
the FY 2007 enacted level. 

* Between FYs 2004 and 2008 (requested), total FTEs would decline 6.3 
percent, from 99,055 to 92,814. 

* The decline in FTEs is due, in part, to reduced staffing devoted to 
paper return processing, which is part of taxpayer service. As noted 
earlier, IRS used almost 1,700 (36 percent) fewer staff years for 
processing tax returns in 2006 than in 1999. 

Figure 2: Funding for IRS Enforcement and Taxpayer Service Programs and 
Related Support Functions, FYs 2004-2008: 

[See PDF for Image] 

Source: GAO analysis of IRS data. 

[A] These data, based on assumptions prior to Congress passing IRS's 
fiscal year 2007 budget, are the best available on total taxpayer 
service and enforcement spending in 2007 as IRS was unable to provide 
updated data in time for this briefing. 

[End of figure] 

Proposed spending could help address the tax gap but there is limited 
information on impact. 

To help address the tax gap, the budget request proposes additional 
revenue-producing initiatives, non revenue-producing initiatives, and 
legislative proposals. 

* The expected direct revenue to be gained from revenue-producing 
initiatives and legislative proposals is small compared to the size of 
the tax gap. Direct revenue includes the additional dollars generated 
through increased enforcement efforts, such as through audits or 
collections. 

* Additional enforcement staffing to be hired for these initiatives is 
expected to yield about $699 million in direct revenue in FY 2010, 
about 1/4 of 1 percent of the tax year 2001 net tax gap. 

* Of the 16 legislative proposals on tax gap reduction, 7 are related 
to expanded information reporting. The legislative proposals are 
estimated to produce $1.9 billion in additional revenue in FY 2010. 

* In 2010, the total estimated increased revenues from both the revenue-
producing initiatives and legislative proposals, about $2.6 billion, is 
about 0.9 percent of the 2001 net tax gap. 

Increased enforcement could have indirect revenue effects that exceed 
direct revenue, but indirect effects are not known or addressed in the 
budget. 

Indirect revenue of enforcement includes the additional revenue 
generated due to targeted taxpayers' increased voluntary compliance in 
subsequent years and the deterrent effect of enforcement on the larger 
population. Widespread agreement exists that IRS enforcement programs 
have indirect revenue effects through increases in voluntary tax 
compliance. 

* Several research studies by economists, while subject to data 
limitations, suggest that indirect revenue might exceed direct revenues 
gained.[Footnote 12] 

* The precise magnitude of the indirect effects of enforcement is not 
known given challenges in measuring compliance developing reasonable 
assumptions about taxpayer behavior; and accounting for factors outside 
of IRS's actions that can affect taxpayer compliance, such as changes 
in tax law. 

* That the impact of increased enforcement and legislative proposals on 
the tax gap is small is consistent with our previous statements which 
noted that no single approach-such as increased enforcement efforts-is 
likely to fully and cost effectively address noncompliance. 

- The tax gap has multiple causes and spans different types of taxes 
and taxpayers. 

- Multiple approaches are needed to reduce the tax gap, including 
providing IRS additional enforcement authority and tools and 
simplifying the tax laws. 

Justifications of new spending initiatives vary in depth of useful 
information provided. 

To better understand IRS's initiatives and their expected benefits and 
costs, we asked for supplementary documentation on selected new 
spending initiatives: 

* Improve tax gap estimates, measures, and noncompliance detection: 
$41.0 million; 258 FTEs: 

* Improve compliance for large multinational businesses: $26.2 million; 
158 FTEs: 

* Improve compliance among small businesses and self-employed 
taxpayers: $73.2 million; 485 FTEs: 

* Critical upgrades to IT infrastructure: $60 million; 0 FTEs: 

* Research effects of taxpayer service on compliance: $5 million; 8 
FTEs: 

* Expand volunteer income assistance: $5 million; $46 FTEs: 

For the six initiatives we reviewed, the budget request and 
supplementary documents varied in the detail provided to justify new 
spending initiatives, for example: 

* Documents for the IT infrastructure initiative included information 
on the extent of the problem to be addressed by new spending, including 
its impact on employee performance. However, the documents supporting 
expanding volunteer income tax assistance had no such information, such 
as, for example, evidence of how current spending levels result in some 
groups of taxpayers not receiving needed services. 

* Beyond the general, half-page description in the budget request, IRS 
lacked documentation to justify the initiative to research the effects 
of taxpayer service on compliance, such as potential research questions 
or methodologies. While we have been supportive of this kind of 
research, without more detailed documentation we cannot comment on 
specifics of the proposal, such as the proposed research approach and 
how IRS determined needed resources. 

We continue to assess the documentation for the initiatives and whether 
IRS could cost effectively provide additional useful information for 
Congress and others as they consider the appropriate level of funding 
for IRS. 

IRS's request shows savings, but other savings opportunities may exist. 

As it has in prior years, IRS identified millions in savings based on 
its past history of reporting achieving those savings, we have no 
reason to believe those savings will not materialize. 

We have suggested that Congress mandate electronic filing for certain 
paid preparers. Much of IRS's proposed savings continue to result from 
efficiencies-from electronic filing. 

IRS may be able to better identify the mix of taxpayer service deliver 
methods to best meet taxpayer needs more cost effectively. IRS's 
comprehensive study of taxpayer service delivery options is several 
months behind schedule. In his March 20, 2007, testimony, the 
Commissioner of IRS said the report will be released soon. 

We and TIGTA have long reported that IRS has faced challenges in 
managing and improving the quality of services provided by volunteer 
organizations. If IRS is unable to ensure that quality is up to an 
acceptable level, it might need to rethink its funding for these in the 
future. 

GAO has done past work related to some of the budget's information 
reporting proposals and suggested them as options for reducing the tax 
gap .[Footnote 13] 

Status of BSM: 

Additional progress made in BSM implementation, but challenges and 
risks remain. 

IRS continues to make progress in implementing BSM projects and meeting 
cost and schedule commitments, but two key projects experienced 
significant cost overruns during 2006-CADE and Modernized e-File. 
According to IRS, the cost overrun for Modernized e-File was due in 
part to upgrading infrastructure to support the electronic filing 
mandate for large corporations and tax exempt organizations which was 
not in the original projections or scope. 

Future BSM project releases continue to face significant risks and 
issues, which IRS is addressing. Delays in deploying the latest release 
of CADE have resulted in continued contention for key resources and 
will likely impact the design and development of the next two important 
releases, scheduled to be deployed later this year. The potential for 
schedule delays, coupled with reported resource constraints and 
expanding complexity of CADE, increases the risk of scope problems and 
the potential for deferring planned functionality to later releases. 
Maintaining alignment between the planned releases of CADE and the new 
Accounts Management Services project-intended to deliver improved 
customer support--is also a key area of concern because of the 
functional interdependencies. The agency recognizes the potential 
impact of these project risks and issues on its ability to deliver 
planned functionality within cost and schedule estimates, and has 
developed mitigation strategies to address them. 

IRS has made further progress in addressing high-priority BSM program 
improvement initiatives during the past year, including efforts related 
to hiring and training 25 entry-level programmers to support CADE 
development. 

IRS has made significant progress in implementing our prior 
recommendations, including improving its modernization management 
controls and capabilities and developing an updated modernization 
vision and strategy. However, critical controls and capabilities 
related to requirements development and management and post 
implementation reviews of deployed BSM projects are not yet fully 
implemented. 

IRS has more to do to fully address our prior recommendation of 
developing a long-term vision and strategy for completing the BSM 
program, including establishing time frames for consolidating and 
retiring legacy systems. 

450550: 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110 or whitej@gao.gov: 

Staff Acknowledgment: 

In addition to the contact person named above, Amy Dingler, Charles R. 
Fox, Carol Henn, Timothy D. Hopkins, Ronald W. Jones, Matthew Kalmuk, 
Varflay Kesselly, Jennifer McDonald, Paul B. Middleton, Sabine R. Paul, 
David A. Powner, Cheryl Peterson, Neil Pinney, and Joanna Stamatiades 
made key contributions to this report. 

FOOTNOTES 

[1] The $11.6 billion includes $11.1 billion in new appropriated funds 
and $0.5 billion in other funds. 

[2] See, for example, GAO, Tax Administration: IRS Improved Some Filing 
Season Services, but Long-term Goals Would Help Manage Strategic Trade- 
offs, GAO-06-51 (Washington, D.C.: Nov. 14, 2005), Internal Revenue 
Service: Assessment of the Interim Results of the 2006 Filing Season 
and Fiscal Year 2007 Budget Request, GAO-06-615T (Washington, D.C.: 
Apr. 6, 2006), and Tax Administration: Most Filing Season Services 
Continue to Improve, but Opportunities Exist for Additional Savings, 
GAO-07-27 (Washington, D.C.: Nov. 15, 2006). 

[3] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: 
January 2007). 

[4] The tax gap is an estimate of the difference between what taxpayers 
pay in taxes voluntarily and on time and what they should pay under the 
law. 

[5] GAO, Business Systems Modernization: Internal Revenue Service's 
Fiscal Year 2007 Expenditure Plan, GAO-07-247 (Washington, D.C.: Feb. 
15, 2007). 

[6] GAO-07-247. 

[7] GAO Tax Administration: Most Filing Season Services Continue to 
Improve, but Opportunities Exist for Additional Savings, GAO-07-27 
(Washington, D.C: Nov. 15, 2006). 

[8] We are in the process of obtaining additional information to 
evaluate IRS's projections of TETR. 

[9] See GAO, Tax Administration: IRS Improved Some Filing Season 
Services, but Long-term Goals Would Help Manage Strategic Trade-offs, 
GAO-06-51 (Washington, D.C.: Nov. 14, 2005) and TIGTA Taxpayer Service 
is Improving, but Challenges Continue in Meeting Expectations, 
Reference No. 2006-40-052 (Washington, D.C.: Feb. 17, 2006). 

[10] The $11.6 billion includes $11.1 billion in appropriated resources 
and $0.5 billion in other resources, including such funds as user fees 
and funds available for obligation over multiple years. Continuing 
resolution data is based on assumptions prior to Congress passing IRS's 
FY 2007 budget and is the best available as IRS was unable to provide 
updated data in time for this briefing. 

[11] IRS provided updated FTE data based on its enacted FY 2007 budget. 

[12] For citations of research studies, see GAO, Tax Compliance: 
Multiple Approaches Are Needed to Reduce the Tax Gap, GAO-07-488T 
(Washington, D.C.: Feb. 16, 2007). 

[13] For citations of our past reports, see GAO-07-488T. 

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