This is the accessible text file for GAO report number GAO-07-570 
entitled 'TaxPayer Service: State Experiences Indicate IRS Would Face 
Challenges Developing an Internet Filing System with Net Benefits' 
which was released on April 12, 2007. 

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Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

April 2007: 

Taxpayer Service: 

State Experiences Indicate IRS Would Face Challenges Developing an 
Internet Filing System with Net Benefits: 

GAO-07-570: 

GAO Highlights: 

Highlights of GAO-07-570, a report to the Committee on Finance, U.S. 
Senate 

Why GAO Did This Study: 

Some states and countries allow taxpayers to prepare and file tax 
returns on their Internet Web sites at no charge, an option not 
available to federal taxpayers. Such a service might mitigate the 
concerns taxpayers have about current electronic filing options, which 
require filing through a third party and may involve fees. Increased 
electronic filing would reduce IRSís paper processing costs, reduce 
transcription errors, and speed up refunds. 

However, the idea is controversial. IRS already has a Free File program 
which offers free return preparation and filing by private companies 
for some people via IRSís Web site. Some are opposed to IRS competing 
with tax preparation software companies. 

GAO was asked to (1) describe IRSís options for on-line preparation and 
filing (I-file) based on statesí experiences; (2) determine the 
benefits and costs of I-file based on the experiences of the states; 
and (3) describe the potential for IRS to realize cost savings from I-
file. GAO profiled 7 states and the District of Columbia, 2 foreign 
countries and 3 federal agencies to describe I-file options and 
determine their benefits and costs. 

Commenting on a draft of this report, the IRS Commissioner said he 
appreciated our observations on the statesí experiences. 

What GAO Found: 

The options available to IRS for implementing I-file system vary in 
technology, features, and eligibility. The states profiled all employed 
an interactive format on their Web sites for tax return preparation. 
The systems varied in whether they included features such as the 
ability to save and return. Systems also varied in eligibility, i.e. 
limiting income or residency. 

For the systems profiled, both reported benefits and costs were 
relatively modest and it is unclear whether benefits were greater than 
costs. I-file systems may generate benefits by increasing electronic 
filing and reducing filing fees for taxpayers. California and 
Pennsylvania estimated savings of $1.00 per return and $3.47 
respectively per return converted from paper. However, the benefits 
were limited by low usage. I-file usage rates were less than 6 percent. 
Available data on I-file costs, while limited, shows costs are a very 
small percentage of state tax agenciesí budgets. For example, 
California reported spending $700,000 to develop and operate CalFile 
from 2003 to 2005óless than 0.1 percent of the tax agencyís annual 
budget. States kept I-file costs relatively modest by restricting 
eligibility and features. Several states used contractors to develop 
and operate their I-file system as well as provide the computer 
hardware. Low usage also contributed to modest costs. For example, some 
states said low usage meant they could use existing computer equipment. 

IRSís potential to realize net cost savings from an I-file system 
depends on the costs of developing the system and the number of 
taxpayers converted from paper to electronic filing. IRSís costs could 
be higher than the statesí. First, the federal tax system is more 
complex. Second, unlike states which already had Web sites with 
Internet transaction capabilities, IRS would have to significantly 
upgrade its Web site and incur new security costs. Finally, developing 
an I-file system would further stretch IRSís capability to manage 
systems development, a GAO high risk area since 1995. Converting paper 
filers to electronic filing generates savings of $2.36 per return, 
according to IRS estimates. However, the number of paper filers who 
would convert is uncertain. The 13 million individual taxpayers who 
prepared their returns on a computer but then printed and mailed them 
to IRS are one target for conversion to I-file. 

Table: I0File System 2006 Usage rates for 7-state Agencies and the 
District of Columbia: 

California; 
I-file Users: 111,436; 
Total filers: 14.6 million; 
Percentage of total filers: 0.76%. 

District of Columbia; 
I-file Users: 9,285; 
Total filers: .3 million; 
Percentage of total filers: 3.19%. 

Indiana; 
I-file Users: 83,422; 
Total filers: 3.0 million; 
Percentage of total filers: 2.74%. 

Kansas; 
I-file Users: 50,999; 
Total filers: 1.4 million; 
Percentage of total filers: 3.59%. 

Maryland; 
I-file Users: 115,678; 
Total filers: 2.8 million; 
Percentage of total filers: 4.17%. 

Pennsylvania; 
I-file Users: 300,552; 
Total filers: 5.6 million; 
Percentage of total filers: 5.32%. 

South Carolina; 
I-file Users: 29,241; 
Total filers: 2.0 million; 
Percentage of total filers: 1.43%. 

Utah; 
I-file Users: 25,267; 
Total filers: 1.0 million; 
Percentage of total filers: 2.51%. 

Source: State tax agencies. 

Note: Usage rates are based on the total number of filers, not the 
number of eligible I-file users. 

[End of table] 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-570]. 

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

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

I-file Systems Use Two Main Technologies and Offer a Range of Features 
and Taxpayer Eligibility Requirements: 

State Agencies' I-file Benefits and Costs Have Been Relatively Modest: 

Achieving a Net Cost Savings for IRS Depends on the Cost of Developing 
the System and the Number of Paper Filers Converted: 

Agency Comments: 

Appendix I: Individual Profiles: 

Appendix II: One-time, Ongoing, Variable, and Fixed Costs: 

Appendix III: Objectives, Scope, and Methodology: 

Appendix IV: Comments from the Internal Revenue Service: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Individual Returns by Filing Methods, 2006 Filing Season: 

Table 2: Eight I-file Systems and System Name, Technology, Key 
Features, Eligibility Requirements, and Year Implemented: 

Table 3: 2006 I-file System Usage Rates for Eight State Agencies: 

Table 4: I-file System Usage Rates for Selected Foreign Tax Agencies 
and Federal Agencies: 

Table 5: Advantages and Disadvantages to Taxpayers of Alternative Tax 
Preparation and Filing Methods: 

Table 6: Available Cost Information on Agencies I-file Systems: 

Table 7: California: 

Table 8: District of Columbia: 

Table 9: Indiana: 

Table 10: Kansas: 

Table 11: Maryland: 

Table 12: Pennsylvania: 

Table 13: South Carolina: 

Table 14: Utah: 

Table 15: Department of Agriculture: 

Table 16: Department of Education: 

Table 17: Department of Veterans Affairs: 

Table 18: France: 

Table 19: United Kingdom: 

Table 20: Types of One-Time and Ongoing Costs Agencies Can Incur When 
Developing and Operating an I-file System: 

Figures: 

Figure 1: Preparation and Filing Methods for Individual Federal 
Taxpayers or Their Paid Preparers: 

Figure 2: Percentage of Individual IRS Returns by Preparation and 
Filing Method, Calendar Years 1997-2006: 

Figure 3: Percentage of State Tax Returns by Preparation and Filing 
Method for Individuals, Calendar Years 1998-2006: 

Figure 4: Examples of I-file Systems and Features: 

Figure 5: Computer Screen Picture/Image of USDA's eForms Showing Save 
and Submission Features: 

Figure 6: Computer Screen Picture/Image of Maryland's I-file System 
Showing Calculations and Hyperlinks: 

Abbreviations: 

ETA: Electronic Tax Administration: 

ERO: Electronic Return Originator(s): 

IRS: Internal Revenue Service: 

IT: Information Technology: 

HTML: Hyper Text Mark-up Language: 

MeF: Modernized e-File: 

MITS: Modernization and Information Technology Services: 

PDF: Portable Document Format: 

USDA: United States Department of Agriculture: 

United States Government Accountability Office: Washington, DC 20548: 

April 5, 2007: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

In 2006, about 72 million of the 130 million individual federal tax 
returns were filed electronically. The other 58 million were filed on 
paper. Paper returns cost more for the Internal Revenue Service (IRS) 
to process and have disadvantages for taxpayers as well. IRS must 
transcribe paper returns to its computerized databases, a process that 
is labor intensive, slows down refunds, and inevitably introduces 
errors. By 2006, the growth of electronic filing had allowed IRS to 
close two paper processing centers and eliminate 1,600 staff years, 
resulting in a savings of tens of millions of dollars. 

Of the 58 million paper returns, 42 million (about 72 percent) were 
prepared electronically on computers but then printed and mailed to IRS 
rather than being filed electronically. Taxpayers cite security 
concerns and electronic filing fees as some of the reasons for not 
filing electronically. IRS does not have the capability to receive 
electronic returns directly from taxpayers. Taxpayers filing 
electronically must do so through third-party transmitters, such as 
paid preparers and tax preparation software companies, who route the 
tax returns to the IRS and may charge for the service. 

Some states and other countries allow taxpayers to prepare and file 
returns directly on tax agency Internet Web sites (what we will call I- 
file), an option not available to federal taxpayers. In 2006, 20 states 
and the District of Columbia offered this service to taxpayers; three 
states had discontinued an I-file service; 9 had no state income 
tax;[Footnote 1] and 18 states do not offer an I-file service. A return 
preparation and filing option on IRS's Web site could reduce cost for 
taxpayers and mitigate any concerns about the security of third-party 
transmitters. However, the idea is controversial. Some see it as 
unnecessary because of IRS's Free File program, which allows taxpayers 
below an income ceiling to access free tax preparation software 
provided by private sector companies and then file their returns 
electronically at no charge. Others are concerned about the impact IRS 
direct Internet filing would have on the tax preparation software 
industry. 

Because of your interest in information on whether IRS should provide 
tax preparation software and electronic filing on its Web site, you 
asked us to describe various I-file options and what is known about 
their use. Our objectives were to: (1) describe the options available 
to IRS for developing an I-file service based on states' experiences, 
(2) determine the benefits and costs associated with a range of I-file 
options based on the experiences of selected states, countries, and 
federal agencies, and (3) describe the potential for IRS to realize 
cost savings from providing an I-file service. 

Our review is based on data analysis, interviews, and examinations of 
agencies' Internet Web sites. We developed in-depth profiles of seven 
states and the District of Columbia[Footnote 2] tax agencies to 
illustrate the range of Internet filing systems, types of features, and 
level of usage. We used the following criteria to select these 
agencies: (1) number of I-file users, (2) year I-file system was 
implemented, (3) whether the I-file system was developed by a 
contractor or in-house, and (4) types of features offered. We collected 
information in less depth for two foreign tax agencies and three 
federal agencies with I-file systems. 

To collect this information we developed a data collection instrument 
and conducted structured interviews with agency officials about usage 
rates, system features, eligibility requirements, benefits to agencies 
and taxpayers, and system costs. We also interviewed officials from two 
of the three states that discontinued an I-file service. We saw 
consistency in the types of benefits state tax agencies reported. Based 
on previous GAO work and discussions with state agency and IRS 
officials, we understand that electronic filing reduces the number of 
processing staff needed, for example, and generates dollar savings. We 
determined that state estimates of savings per return are sufficiently 
reliable as a general indicator, but not necessarily as a precise 
indicator, of savings. 

We summarized tax agency costs on a total cost basis and per return 
basis. No state could give us complete cost information; however, the 
data gathered covered large elements of total costs such as development 
and operating costs. When available we reviewed state documents such as 
feasibility studies, post-implementation evaluations, and contracts 
with companies that developed or operated some of the systems. Based on 
the consistency of the reporting from the eight states, we determined 
that the data were reliable for estimating the rough magnitude of total 
costs. We compared the types of system development and operations costs 
states incurred with the types of costs IRS would likely face in 
developing and operating an I-file system. Appendix III provides a more 
detailed scope and methodology. We performed our work from May 2006 
through March 2007 in accordance with generally accepted government 
auditing standards. 

Results in Brief: 

The options available to IRS for implementing an I-file system vary in 
technology, features, and eligibility. Two main technologies are used 
to collect data from taxpayers: PDF fillable form technology often 
looks like the paper version of a form and Web page technology is 
interactive and prompts the user to respond to preformatted questions. 
Optional features allow users to create an account, perform 
calculations, access help information, and view prior years' 
information. The eight state tax agencies we profiled all used Web page 
technology, but varied in whether they offered all these features. 
States also varied by taxpayer eligibility. Some states restricted 
taxpayer eligibility, for example, by placing limits on income, types 
of deductions, types of tax forms, or residency. 

For the eight states we profiled, both I-file benefits and costs were 
relatively modest and it is unclear whether benefits were greater than 
costs. State I-file systems generated benefits by increasing e-filing 
and reducing paper filing and reducing filing fees for taxpayers, 
according to officials in the eight states profiled. California 
estimated a savings of $1.00 per return converted from paper to e- 
filing, while Pennsylvania officials estimated that they saved $3.47 
per return. However, the overall benefits were limited by low usage. In 
the eight states profiled, I-file usage rates ranged from less than 1 
percent to just over 5 percent of taxpayers. Some state officials said 
low usage was partly due to a lack of marketing. Another factor may 
have been convenience. Taxpayers could only prepare their state returns 
on the I-file systems and had to use other preparation methods for 
their federal returns. The cost data available from the states 
profiled, while incomplete, implies that agency costs were relatively 
modest. For example, California spent just over $700,000 to develop and 
operate CalFile, its version of an I-file system, from 2003 to 2005 -- 
less than one-tenth percent of the tax agency's annual budget. 
Restrictions on taxpayer eligibility and system features helped keep 
costs modest as did the use of contractors. Several states used 
contractors and spread the costs of systems development over multiple 
services, not just tax services. Some had systems that operated on the 
contractor's computer hardware. Low usage also contributed to modest 
costs since several states did not need to purchase additional computer 
hardware to support their I-file systems. Whether benefits from I-file 
were greater than the costs is unclear in states profiled for two 
reasons - state agencies had incomplete data and reported modest 
benefits and costs. In 2004, California, for example, estimated that 
67,000 users converted from paper to I-file for a savings of $67,000 in 
processing costs. California estimated it spent $256,000 developing and 
operating I-file in 2004. 

IRS's potential to realize net cost savings from an I-file system 
depends on the costs of developing the system and the number of 
taxpayers converted from paper to electronic filing. IRS's costs to 
provide a new I-file service could be higher than states' for a number 
of reasons. First, the federal tax system is more complex. Second, 
IRS's existing Web site cannot be used for transactions such as filing 
a tax return. Unlike some of the states we profiled which had 
transactional Web sites before developing their I-file systems, IRS 
would need to develop a transactional Web site for I-file, which would 
require additional security and other features. Third, the states 
profiled built their systems using existing capacity while IRS would 
likely have to purchase additional computer hardware. And finally, 
developing an I-file system could further stretch IRS's capability to 
manage systems development, an area we have designated high risk since 
1995. IRS could achieve a net cost savings if the costs saved by 
reduced paper processing were greater than the costs incurred from 
developing and operating an I-file system. The key to IRS achieving a 
net cost savings depends on the number of individuals converted from 
paper to electronic filing and the savings per return (estimated to be 
$2.36 by IRS). However, the accuracy of IRS's cost estimates may be 
problematic given inadequacies in its financial accounting system. 
Further, it is uncertain how many of the 58 million paper tax returns 
filed in 2006 would be converted to I-file. Over 13 million taxpayers 
self-prepare their returns on a computer but then print and mail them 
to IRS. These taxpayers are an attractive target for I-file because 
they already have access to a computer and may be more willing to try I-
file. However, IRS's Free File program, designed to attract similar 
taxpayers, only had 4 million users (about 3 percent of total taxpayers 
and 4 percent of eligible taxpayers) in 2006. 

In written comments on a draft of this report, the Commissioner of 
Internal Revenue said he appreciated our observations on the states' 
experiences and summarized the facts in the report. He then reached the 
conclusion that the facts support IRS's current strategy for growing 
electronic filing. 

Background: 

Individual federal taxpayers have several options for preparing and 
filing their returns as shown in figure 1. 

Figure 1: Preparation and Filing Methods for Individual Federal 
Taxpayers or Their Paid Preparers: 

[See PDF for image] 

Source: GAO analysis of IRS information. 

[End of figure] 

Using the traditional method, taxpayers or their preparers prepare 
paper returns and then file the returns by mailing them to one of IRS's 
submission processing centers. At the submission processing centers, 
paper returns are opened and sorted, checked for completeness, numbered 
with an identifying code, manually transcribed into IRS's computerized 
databases, and checked for accuracy. Transcribing paper returns 
inevitably introduces errors that then must be resolved by IRS and 
taxpayers. IRS devoted 2,798 staff years to paper processing in 2006. 
About 58 million taxpayers submitted their returns on paper in 2006. 

For a number of years, some taxpayers or preparers have used tax 
preparation software to prepare returns electronically. However, after 
returns have been electronically prepared taxpayers cannot transmit 
them directly to IRS in order to electronically file them. Instead, 
only paid tax preparers and tax preparation software companies that IRS 
has designated as electronic return originators (ERO) can transmit tax 
returns electronically to IRS. These companies may charge taxpayers for 
the services they provide, including electronic filing. Taxpayers who 
prepare their returns on their home computer and then use the 
electronic filing option are actually sending their returns 
electronically to an ERO. The EROs typically bundle returns from many 
taxpayers and then electronically forwards them to IRS. IRS conducts 
suitability checks of applicants who are applying to become EROs. These 
checks may include checking the applicants' criminal background, credit 
history, and tax compliance. In 2006, approximately 72 million returns 
were submitted electronically. As shown in figure 1, electronic filing 
eliminates a number of steps necessary for processing paper returns. 

In 2002, IRS entered into an agreement with the Free File Alliance, a 
consortium of tax preparation companies, to provide on-line electronic 
preparation and filing to eligible taxpayers at no charge. Taxpayers 
can access Free File on IRS's Web site, which provides links to the Web 
sites of the Free File Alliance companies.[Footnote 3] Taxpayers 
prepare their returns using free software on the companies' Web sites 
and then electronically file their returns from the Web sites. In 2005, 
eligibility was restricted to taxpayers with incomes of 
$50,000[Footnote 4] or less. The number of tax returns filed through 
Free File for filing season 2006 was about 4 million. As part of the 
Free File agreement, IRS agreed not to compete with the Alliance 
members by providing free, on-line tax return preparation and filing 
services to taxpayers on its Web site. 

Some taxpayers electronically prepare their returns but they choose to 
print and mail the tax return to IRS. These taxpayers are known as "v- 
coders" because IRS codes these returns with a "v" for processing 
purposes and to track separately from other paper filers. As shown in 
table 1, out of the 58.3 million paper returns submitted last year, 
approximately 42 million were v-coded returns. V-coders are an 
attractive target for conversion to e-filing because these taxpayers 
already have access to computers and electronically prepare their 
returns, both prerequisites for electronic filing. 

Table 1: Individual Returns by Filing Methods, 2006 Filing Season: 

Numbers in millions (percentage). 

Total individual tax returns: 130.2 (100%). 

Returns filed via paper; 
58.3 (45%). 

Self-prepared returns; 
28.3 (22%). 

V-coders; 
13.6 (10%). 

Returns by paid preparers; 
30.0 (23%). 

V-coders; 
28.8 (22%). 

Returns filed electronically; 71.9 (55%). 

Self-prepared returns; 
21.2 (16%). 

Free filed; 
4.0 (3%). 

Returns by paid preparers; 
50.8 (39). 

Source: GAO analysis of IRS data as of August 2006. 

Note: All percentages are based on the total number of returns. Numbers 
may not sum to totals because of rounding. 

[End of table] 

Until 2005, federal taxpayers had the option to Telefile. Telefile 
allowed taxpayers with simple returns to file electronically via 
telephone. This service was discontinued in 2005 because of declining 
usage and relatively high costs. 

Very generally, I-file is a Web site application that allows users to 
prepare and submit information to an agency electronically. Since the 
late 1990s, almost half of the states have offered an I-file service to 
taxpayers. Currently, 20 states and the District of Columbia currently 
offer this service to taxpayers. Three states have discontinued an I- 
file service for taxpayers. In addition, several foreign tax agencies 
offer I-file services. Also, some federal agencies offer nontax I-file 
services that, for example, allow users to apply for benefits on-line. 
Individuals applying for federal student aid, agricultural grants and 
loans, and veterans' benefits may choose to use the agencies' Web sites 
to prepare and submit applications rather than using paper to prepare 
forms and the mail to submit forms. For example, since 1997, the 
Department of Education has offered individuals an I-file service for 
preparing and submitting the Free Application for Federal Student Aid. 

Figure 2 shows the growth of federal electronic filing since 1997. 
According to IRS officials, it is getting harder to convert taxpayers 
to electronic tax return filing since those who might convert most 
readily have already done so. 

Figure 2: Percentage of Individual IRS Returns by Preparation and 
Filing Method, Calendar Years 1997-2006: 

[See PDF for image] 

Source: GAO analysis of IRS data. 

Note: Figure includes some rounded totals for paper returns. 

[End of figure] 

Electronic filing has also grown at the state level, as shown in figure 
3. Several states imposed electronic filing mandates on tax preparers 
who meet certain criteria, such as filing 100 state tax returns or 
more, which contributed to increased electronic filing. Moreover, state 
taxing authorities are using technologies such as I-file and 2-D 
barcode[Footnote 5] to enable more efficient processing of returns. 

Figure 3: Percentage of State Tax Returns by Preparation and Filing 
Method for Individuals, Calendar Years 1998-2006: 

[See PDF for image] 

Source: GAO analysis of Federation of Tax Administrators data. 

[End of figure] 

Within IRS, the Wage and Investment Division (W&I) and Modernization 
and Information Technology Services (MITS) have a role in electronic 
filing. W&I's Electronic Tax Administration (ETA) administers IRS's 
electronic filing programs and is responsible for receiving and 
processing tax returns electronically filed through EROs by taxpayers 
and preparers. MITS has the information technology (IT) and programming 
staff that develops and maintains IRS's electronic filing systems, 
including hardware and software. 

IRS currently has a project underway, Modernized e-File (MeF), to 
replace its current electronic filing technology with a modernized, 
Internet-based electronic filing application. Successful implementation 
of the MeF system will give IRS increased capability to accept 
electronically filed returns (including individual returns) from EROs. 
Neither the current e-filing technology nor MeF does allow direct 
electronic filing by individuals. 

I-file Systems Use Two Main Technologies and Offer a Range of Features 
and Taxpayer Eligibility Requirements: 

I-file systems have a range of design options. Two main technologies 
used to collect data from taxpayers exist: PDF[Footnote 6] fillable 
form technology often looks like the paper version of a form and Web 
page technology is interactive and prompts the user to respond to 
preformatted questions. Figure 4 illustrates the variety of features 
available with either technology. Tax agencies that have I-file systems 
also established a variety of eligibility requirements for taxpayers. 

Figure 4: Examples of I-file Systems and Features: 

[See PDF for image] 

Sources: GAO analysis of USDA, State of California, Her Majesty's 
Revenue and Customs, and State of Maryland information; 
PhotoDisc(images). 

[End of figure] 

PDF Fillable Forms: 

PDF fillable form technology can closely resemble or reproduce the 
paper version of the form. This is one technology often used when 
agencies want to show users the paper version of a form. The PDF 
fillable forms are accessed through the agencies' Web site, but users 
need additional software (PDF readers are available for free on the 
Internet) to view and fill in the fields. 

The U.S. Department of Agriculture (USDA) has offered PDF fillable 
forms with direct submission to support USDA's Rural Development eForms 
System since 2002. USDA initially offered 200-300 on-line forms but 
later expanded the system to about 1,500 eForms for the public and USDA 
employees to prepare and submit forms directly on USDA's Web site. 
Individuals may use the agency's Web site to apply for a number of 
programs such as agriculture conservation, crop disaster, rural water, 
and farm loans. Users of USDA's eForms can access the system with and 
without a user account. If a user creates an account with USDA, the 
user may save forms on USDA's Web space and electronically submit the 
forms to the agency via the agency Web site. With an account, users may 
also bundle several forms together for submission. Once the forms are 
submitted electronically, the user receives an instant confirmation 
code, which users may reference if any questions arise. Additionally, 
users may use the account to view the status of the forms, and resubmit 
any form that may need corrections. Figure 5 shows a USDA fillable form 
with save and submission features. 

Figure 5: Computer Screen Picture/Image of USDA's eForms Showing Save 
and Submission Features: 

[See PDF for image] 

Source: USDA. 

[End of figure] 

Without an account, users can search and download forms from the Web 
site, fill the forms in, and print the forms. However, users cannot 
submit forms electronically. USDA's eForms provide basic instructions, 
like the paper version, and more detailed instructions are provided in 
separate PDF documents. After the user completes the form, it may be 
saved on a personal computer or printed and mailed to the agency. 

IRS currently provides PDF fillable form versions of some tax return 
forms and schedules. These forms can be downloaded to a home computer, 
filled in, printed, and mailed back to IRS. They cannot be filed 
electronically with IRS and, therefore, are not an I-file option. 

Web Pages That Allow Data Entry: 

Another technology uses Web pages (HMTL),[Footnote 7]an interactive, 
ease-of-use Web site feature, containing checkboxes, option lists, text 
boxes, and buttons that allow users to respond to preformatted 
questions. Web pages do not always resemble the paper version of the 
form but collect similar information. Because these Web pages can be 
viewed using a regular Web browser, users usually do not need 
additional software. 

Similar to the PDF fillable forms, Web pages allow the agency to choose 
the features offered to the user. Some agencies offer fewer features to 
users. For example, both Utah's TaxExpress and California's CalFile 
systems allow users to log-in/create an account, perform calculations, 
link to other forms and publications, and submit directly to the 
agency. Other agencies have more sophisticated systems which offer more 
features. For example, United Kingdom's Self Assessment system allows 
users to save their partially completed forms and return to the system 
at a later time,[Footnote 8] edit the forms, and view any changes made. 

Another example of a more sophisticated system with multiple features 
is Maryland's I-file. Maryland offers features such as account access, 
calculations, and hyperlinks to other forms and publications. It also 
allows users to save work and return later and view prior years' 
returns. The Maryland system also prepopulates some of the taxpayer's 
biographic information[Footnote 9] and allows users to check the status 
of their current return. Figure 6 shows a computer screen picture/image 
of Web page technology with calculations and hyperlinks to help 
features from Maryland's I-file system. 

Figure 6: Computer Screen Picture/Image of Maryland's I-file System 
Showing Calculations and Hyperlinks: 

[See PDF for image] 

Source: State of Maryland. 

[End of figure] 

Eight States We Profiled Offer I-file Systems with a Variety of 
Features and Taxpayer Eligibility Requirements: 

Table 2 describes the I-file systems we profiled in eight states. As 
mentioned, state tax agencies offered a range of features such as 
calculations and save and return. Some states restricted eligibility by 
income, residency requirements, or number of itemized deductions. 

Table 2: Eight I-file Systems and System Name, Technology, Key 
Features, Eligibility Requirements, and Year Implemented: 

States: California; 
System name /technology: CalFile; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
Eligibility requirements[A]: 
* Limits on residency, amount of income, type of income, itemized 
deductions, type of credits, number of dependents, types of payments; 
Year implemented: 2003. 

States: DC; 
System name /technology: On-line Tax Filing Service; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto populate some fields; 
* Status checks; 
Eligibility requirements[A]: 
* Must have filed a return the previous year; 
Year implemented: 2002. 

States: Indiana; 
System name /technology: I-file; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto populate some fields; 
Eligibility requirements[A]: 
* Limits on type of form; 
* Must have not legally changed first or last names since the last 
filed return; 
Year implemented: 1998. 

States: Kansas; 
System name /technology: Webfile; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto populate some fields; 
* Status checks; 
Eligibility requirements[A]: 
* Limits on income; 
* Open to nonresidents; 
* Must have filed a state return the previous year; 
Year implemented: 2001. 

States: Maryland; 
System name /technology: I-file; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto populate some fields; 
* Status checks; 
* View prior year's information; Eligibility requirements[A]: 
* Limits on number and type of forms; 
* Open to nonresidents; 
Year implemented: 2001. 

States: Pennsylvania; 
System name /technology: pa.direct.file; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; Eligibility 
requirements[A]: 
* Limits on type of income, type and number of forms, credits, and 
types of deductions; 
Year implemented: 2000. 

States: South Carolina; 
System name /technology: SCnetFile!; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Auto populates some fields; Eligibility requirements[A]: 
* Limits on type of income, type of forms, and type of credits; 
* Open to nonresidents; 
Year implemented: 1999. 

States: Utah; 
System name /technology: TaxExpress; 
Web pages technology; 
Key features: 
* Log-in/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Status checks; 
Eligibility requirements[A]: 
* Limits on income, type of deductions, and type of credits; 
* Must have filed a state return the previous year; 
Year implemented: 2001. 

Source: GAO analysis of information from states. 

[A] Eligibility requirements are for the 2006 tax year. Appendix I 
contains detailed information on state eligibility requirements. 

[End of table] 

Appendix I provides additional information about each state's I-file 
system such as the extent to which the state used contractors to 
develop and operate the system. Some systems do not operate on computer 
hardware owned by the states, but instead operate on hardware owned by 
contractors. 

State Agencies' I-file Benefits and Costs Have Been Relatively Modest: 

Both the benefits states received from their I-file systems and costs 
of developing and operating them have been relatively modest. Based on 
the available information, it is unclear whether the benefits to the 
states were greater than their costs. 

State I-file Systems Reduced Paper Filing, but the Magnitude of the 
Benefits Was Limited by Low Usage: 

According to officials in five of the eight states we profiled, state I-
file systems generated benefits (before subtracting the costs of system 
development and operation) by increasing e-filing and reducing paper 
filing. However, the benefits were limited by the low usage. As shown 
in table 3, I-file users as a percentage of total filers ranged from 
less than 1 percent to just over 5 percent. Only three states gave us 
estimates of the number of taxpayers eligible to I-file. Pennsylvania 
had 20 percent of eligible taxpayers I-filing in 2006 while California 
and South Carolina both had less than 2 percent. While Pennsylvania had 
20 percent of eligible taxpayers using I-file, GAO is interpreting this 
as a low usage rate since the state instituted the system in 2000. 

Table 3: 2006 I-file System Usage Rates for Eight State Agencies: 

California; 
I-file users: 111,436; 
Eligible filers: 6.4 million; Percentage of eligible filers: 1.74; 
Total filers: 14.6 million; 
Percentage of total filers: 0.76. 

District of Columbia[A]; 
I-file users: 9,285; 
Eligible filers: N/A; 
Percentage of eligible filers: N/A; Total filers: .3 million; 
Percentage of total filers: 3.19. 

Indiana; 
I-file users: 83,422; 
Eligible filers: N/A; 
Percentage of eligible filers: N/A; Total filers: 3.0 million; 
Percentage of total filers: 2.74. 

Kansas; 
I-file users: 50,999; 
Eligible filers: N/A; 
Percentage of eligible filers: N/A; Total filers: 1.4 million; 
Percentage of total filers: 3.59. 

Maryland; 
I-file users: 115,678; 
Eligible filers: N/A; 
Percentage of eligible filers: N/A; Total filers: 2.8 million; 
Percentage of total filers: 4.17. 

Pennsylvania; 
I-file users: 300,552; 
Eligible filers: 1.5 million; Percentage of eligible filers: 20.04; 
Total filers: 5.6 million; 
Percentage of total filers: 5.32. 

South Carolina; 
I-file users: 29,241; 
Eligible filers: 1.5 million; Percentage of eligible filers: 1.95; 
Total filers: 2.0 million; 
Percentage of total filers: 1.43. 

Utah; 
I-file users: 25,267; 
Eligible filers: N/A; 
Percentage of eligible filers: N/A; Total filers: 1.0 million; 
Percentage of total filers: 2.51. 

Source: GAO analysis of state tax agencies. 

Note: N/A is not available: 

[A] Users and calculations based on 2005 data. 

[End of table] 

The benefits to state tax agencies included reducing the costs of 
processing paper returns plus related costs due to correcting math and 
transcription errors and contacting taxpayers about such errors. The 
magnitude of the benefits to tax agencies depends on the savings per 
return and the number of taxpayers converted from paper to electronic 
filing. Returns prepared and filed through I-file that would have 
otherwise been electronically filed do not generate significant 
benefits in the form of reduced costs for the tax agencies. Only 
returns converted from paper to electronic filing generate benefits in 
terms of cost savings for the tax agency. 

Three of the tax agencies we profiled gave us estimates of how much 
converting a return from paper to electronic filing saved them in 
processing costs. California estimated that each taxpayer converted 
from paper to e-filing saved the state about $1.00 in processing costs 
per return. Pennsylvania officials reported it costs about $4.72 to 
process paper returns, while electronically filed returns costs them 
only $1.25--a cost savings of $3.47 per return. One of the largest cost 
savings on a per return basis was reported by Kansas where agency 
officials reported saving $11 per electronic return filed. These 
savings reflect operations in each state and may not indicate savings 
that other states or IRS might achieve. 

State agency officials provided some information about savings beyond 
reduced processing costs but could not provide dollar estimates of the 
savings. Kansas officials said the state had less than a 1 percent math 
error rate for I-filed returns compared to a 17 percent rate for paper 
returns. California officials reported a decrease in math and 
transcription errors. The state agency reported that fewer contacts 
with taxpayers can benefit the agency and yield a savings from fewer 
notices. Maryland officials said they have less need to contact 
taxpayers who I-file. 

The number of taxpayers converted from paper filing to electronic 
filing due to state I-file systems is relatively modest. In an 
evaluation conducted 3 years after CalFile was implemented, California 
estimated that as many as 67,000 I-filers were new e-filers in 2004. 
That number is less than 1 percent of eligible filers in California the 
same year. The other tax agencies we profiled could not document how 
many returns were converted from paper to electronic filing as a result 
of I-file, but the number has to be relatively small because the total 
number of I-file users is relatively small. 

Low usage may be due to a number of reasons, including little marketing 
and the lack of integration with the federal tax system. Officials in 
five states said the amount budgeted for marketing was minimal. 
Pennsylvania reported allocating $20,000 to $40,000 for marketing 
during calendar years 2000 to 2002. The other tax agencies did not 
provide dollar amounts. Using different methods to prepare and file 
state and federal returns can be an inconvenience to taxpayers. Many 
tax preparation software packages offer the convenience of integrating 
federal and state tax return preparation. Much of the required data has 
to be entered only one time and is automatically transferred from the 
federal to the state tax return. Users of state I-file systems would 
have to prepare their federal tax return using one preparation method 
and then learn a second, to prepare their state return. 

Foreign tax agencies with I-file systems and federal agencies with on- 
line application systems reported higher usage rates than the state 
agencies we profiled, as shown in table 4. Reasons differed for the 
higher usage rates among foreign tax agencies and federal agencies. 
French officials offered a financial incentive of 20 euros 
(approximately $26) in 2005 to French taxpayers who filed tax returns 
on-line and paid taxes electronically. An official with France's 
General Tax Directorate said the rebate increased usage to such a 
degree the system was overloaded and officials needed to extend the 
filing deadline. One federal agency attributed high usage to the type 
of user the agency serves. An official with the Department of Education 
said usage of the on-line financial aid system was high, due in part, 
to the target population of students who are Internet-savvy. 

Table 4: I-file System Usage Rates for Selected Foreign Tax Agencies 
and Federal Agencies: 

United Kingdom; 
I-file users: 2006: 2 million; Total filers: 9 million; 
Percentage of total filers: 22.22. 

France; 
I-file users: 2006: 5.7 million; Total filers: 35 million; 
Percentage of total filers: 16.29. 

Department of Education; 
I-file users: 2006: 11.3 million; Total filers: 13.9 million; 
Percentage of total filers: 81.29. 

Department of Agriculture; 
I-file users: 2006: 4,398; 
Total filers: N/ A; 
Percentage of total filers: N/A. 

Department of Veterans Affairs; I-file users: 2006: 144,220; 
Total filers: N/A; 
Percentage of total filers: N/A. 

Source: GAO analysis of foreign tax agencies and federal agencies 
information. 

Note: N/A is not available. 

[End of table] 

In addition to the benefits to the tax agencies, state I-file systems 
also generated benefits for users. Taxpayers who convert from paper to 
electronic filing because of the availability of I-file received the 
benefits of electronic filing, such as faster refunds. Compared to 
paper filing, Utah's TaxExpress I-file system reduced return processing 
time to 4-5 days from 8-10 days and generated faster refunds. South 
Carolina's SCnetFile! users received direct deposit of refunds within 9-
10 days, paper checks were processed within about 3 weeks, according to 
agency officials. Some taxpayers who convert from paper may benefit by 
not having to respond to notices for math errors, by having lower 
compliance burdens, and by preferring electronic confirmation that the 
tax agency received their return. A benefit to some taxpayers using I- 
file is saving on electronic filing fees. Taxpayers who were charged 
electronic filing fees and convert to I-file would save. Taxpayers, who 
electronically file for free, such as users of the Free File program, 
would not save on fees. Another benefit to some taxpayers using state I-
file systems is the security of not having to file through a third 
party such as an ERO. However, as was noted earlier and shown in 
appendix I, some state I-file systems are operated by contractors on 
the contractors' computer hardware. 

Table 5 compares some of the advantages and disadvantages of the 
various methods of preparing and filing federal tax returns from a 
taxpayer's perspective. 

Table 5: Advantages and Disadvantages to Taxpayers of Alternative Tax 
Preparation and Filing Methods: 

Tax preparation and filing method: Preparation by hand/filing by mail; 
Advantages: 
* No preparation costs; 
* Low cost of submission (postage); 
* No third party involvement with tax return preparation or submission; 
* No computer access needed; 
Disadvantages: 
* Must rely on own knowledge; forms, instructions, and taxpayer 
services provided by tax agency; 
* Slower refunds; 
* Increased errors due to paper processing; 
* Increased incidence of lost documentation; 
* Other required income tax returns (if applicable) are an additional 
task. 

Tax preparation and filing method: Preparation using tax preparation 
software or tax preparer/filing by mail (v-coders); Advantages: 
* Reduced time/tax liability due to software or preparer tax planning 
capability; 
* Easier preparation of other required income tax returns (if 
applicable); 
* Low cost of submission (postage); 
* Third party may not access tax return data during submission; 
* Math and omission error checks; Disadvantages: 
* Cost of software/preparer; 
* Computer access required for software users; 
* Slower refunds; 
* Increased errors due to paper processing; 
* Increased incidence of lost documentation; 
* Third party may have access to tax return data during preparation. 

Tax preparation and filing method: Preparation using tax preparation 
software or tax preparer/filing by ERO; Advantages: 
* Reduced time/tax liability due to software/preparer's tax planning 
capability; 
* Easier preparation of other required income tax returns (if 
applicable); 
* Faster refunds; 
* Fewer errors due to paper processing; 
* Less incidence of lost documentation; 
* Math and omission error checks; Disadvantages: 
* Computer and Internet access required for software users; 
* Cost for software/tax preparer; 
* Third party may have access to tax return data during preparation 
and/or submission. 

Tax preparation and filing method: Preparation using Free File/ filing 
via Free File; Advantages: 
* Reduced time/tax liability due to software/preparer's tax planning 
capability; 
* Easier preparation of other required income tax returns (if 
applicable); 
* Faster refunds; 
* Fewer errors due to paper processing; 
* Less incidence of lost documentation; 
* Math and omission error checks; 
* No cost for filing fees; 
Disadvantages: 
* Not all taxpayers are eligible; 
* Computer and Internet access required; 
* Third party may have access to tax return data during preparation and 
submission. 

Tax preparation and filing method: Preparation using direct Internet 
filing system/ filing directly on agency Web site; Advantages: 
* Same as above; 
* No third party involvement with tax return preparation or submission; 
Disadvantages: 
* Computer and Internet access required. 

Source: GAO analysis. 

[End of table] 

Available Information Indicates That I-file Costs Were Relatively 
Modest Because States Limited Features, Eligibility, and Capacity 
Needs: 

The cost data we were able to gather from the state tax and federal 
agencies we profiled, while incomplete, implies that costs were 
relatively modest. No state tax agency had complete, documented data on 
the costs of developing their I-file systems. In many cases, I-file 
costs were not tracked separately from department-wide activities. No 
state tax agency had available data on costs such as management 
planning and conceptualization or contractor oversight. However, some 
state tax agencies did have estimates for large portions of their I- 
file costs, such as systems development or operating costs, as shown in 
table 6. 

As already noted, state tax agencies varied in the extent to which they 
used contractors or in-house staff to develop or operate I-file 
systems. Three states profiled-Indiana, Kansas, and Utah-used a 
contractor and relied almost wholly on the contractor to provide I-file 
services. The software and servers (computer hardware) are owned and 
operated by the contractors. Some taxpayer support for individuals, 
including technical help desk assistance, is provided by the contractor 
as well. Other states used a contractor to develop the system, but the 
state owned and operated the server. Some states, such as California 
and Maryland, primarily used in-house staff to develop and operate 
their systems. In these states, taxpayers prepared returns on state- 
owned servers. 

Available data on total I-file costs show costs are a small percentage 
of state tax agencies' budgets. For example, California spent just over 
$700,000 to develop and operate CalFile from 2003 to 2005--less than 
0.1 percent of the tax agency's annual budget.[Footnote 10] 
Pennsylvania's pa.direct.file annual operating cost of $125,000 is less 
than 0.1 percent of the Revenue Department's 2006 budget of $176 
million. For states that primarily used contractors, data on specific 
types of costs are not available because many types of costs are 
covered by the fee per return charged by contractors. We did not verify 
cost information provided by state agencies or contractors. While the 
state cost data are incomplete, the data are consistent with what we 
learned about development and operating costs at USDA and the 
Department of Veterans Affairs. 

Table 6: Available Cost Information on Agencies I-file Systems: 

California (costs cover 2003 to 2005)[A]; Development: $511,797; 
Operating: $205,384; 
Marketing: N/A; 
Taxpayer support: N/A; 
Average cost per return: $2.30. 

Pennsylvania[B]; 
Development: $400,000; 
Operating: $125,000; 
Marketing: N/A; 
Taxpayer support: N/A; 
Average cost per return: $0.94. 

District of Columbia (costs are for individual and business I-file)[C]; 
Development: $1-$2 million; 
Operating: $480,000; 
Marketing: N/A; 
Taxpayer support: N/A; 
Average cost per return: N/A. 

Indiana[D]; 
Development: Contractor's fee per return: $1.00; Average cost per 
return: N/A. 

Kansas[E]; 
Development: Contractor's fee per return: $1.00; Average cost per 
return: N/A. 

Utah[F]; 
Development: Contractor's fee per return: $0.75; Average cost per 
return: N/A. 

South Carolina[G]; 
Development: Data not tracked separately from departmentwide services; 
Average cost per return: N/A. 

Maryland[H]; 
Development: Data not tracked separately from departmentwide services; 
Average cost per return: N/A. 

Department of Agriculture[I]; Development: $600,000; 
Operating: $50,000; 
Marketing: N/A; 
Taxpayer support: N/A; 
Average cost per return: N/A. 

Department of Veterans Affairs[J]; Development: $358,500; 
Operating: $40,000; 
Marketing: N/A; 
Taxpayer support: N/A; 
Average cost per return: N/A. 

Department of Education[K]; 
Development: No available information; Operating: [Empty]; 
Marketing: [Empty]; 
Taxpayer support: [Empty]; 
Average cost per return: N/A. 

United Kingdom[L]; 
Development: Data not tracked separately from departmentwide services; 
Average cost per return: N/A. 

France[M]; 
Development: Data not tracked separately from departmentwide services; 
Average cost per return: N/A. 

Source: GAO analysis of state tax agencies, foreign tax authorities, 
and other federal agencies. 

Note: N/A is not available. 

[A] California reported costs for years 2003-2005 for development and 
operating. Officials had a marketing budget of $100,000 for all 
electronic filing in 2005, but did not have a specific marketing budget 
for CalFile. Additional costs to taxpayer support were not tracked. 
Cost per return is a GAO calculation based on state data. 

[B] Pennsylvania reported a one time development cost and annual 
operating costs. For years 2000-2002, officials had marketing budget of 
$20,000-$40,000. Additional costs to taxpayer support were not tracked. 
Cost per return is a GAO calculation based on state data. 

[C] District of Columbia reported a one time development cost and 
annual operating costs, but did not report an annual marketing budget. 
Additional costs to taxpayer support were not tracked. 

[D] Indiana officials reported a contractor's fee per return. 

[E] Kansas officials reported a contractor's fee per return and a 
marketing budget of $100,000 per year for 2006-2007. Additional costs 
to taxpayer support were not tracked. 

[F] Utah officials reported a contractor's fee per return and a one 
time Web site upgrade fee of $30,000. 

[G] South Carolina officials were unable to track cost information 
separate from other department costs. 

[H] Maryland officials were unable to track cost information separate 
from other department costs. 

[I] Department of Agriculture had a marketing budget of $100,000 in 
2002 for the eForms application. 

[J] Department of Veterans Affairs reported a one time development cost 
and annual operating costs, but did not report an annual marketing 
budget. Additional costs to taxpayer support were not tracked. 

[K] Department of Education provided no cost information. 

[L] United Kingdom officials were unable to track cost information 
separate from other department costs. 

[M] France officials were unable to track cost information separate 
from other department costs. 

[End of table] 

The available data also show costs are relatively modest when 
calculated per tax return. Three states that relied heavily on a 
contractor were charged $0.75 per return or $1.00 per return to develop 
and operate I-file systems, as shown in table 6. Based on the data 
provided, we calculated Pennsylvania's I-file average costs per return 
as $0.94 for 2000 to 2006, and California's average costs per return as 
$2.30 for 2003 to 2005. These costs per return are relatively modest 
compared to what the states told us about their costs for processing 
paper returns. For example, Pennsylvania officials said it cost $4.72 
per return to process a paper return. 

Several factors contributed to keeping I-file costs relatively modest. 
Six of the eight state agencies we profiled limited eligibility. Three 
states developed their system incrementally and increased eligibility 
over time. As shown in table 2, some states restricted eligibility by 
income, residency requirements, or number of itemized deductions. 
States also varied on the extent to which they offered system features, 
such as the ability to save a partially completed return and the extent 
to which certain information can be automatically filled in on the form 
using previous years' returns. By limiting eligibility and features, 
agencies can limit certain costs, such as software development and 
testing, that do not change as the number of users changes (fixed 
costs). Restricting the eligibility and features also has some effect 
on costs that do depend on the number of system users (variable costs), 
such as computer hardware and help desk assistance. Variable costs for 
purchases of hardware and telecommunications to support the system can 
also increase if system features become more sophisticated and if the 
system allows users to file more complex returns. Appendix II has more 
information on types of variable and fixed costs agencies incurred in 
implementing an I-file system. 

Another factor that contributed to modest costs was that contracts 
between states and contractors covered the development and operation of 
computer systems that provided multiple services, not just tax 
services. For example, a contractor's representative told us the 
contractor may not recoup all its costs for I-file with the fees 
charged per tax return. Instead, the costs may be recouped from other 
services provided to the state. 

One other factor keeping costs modest was the limited number of 
anticipated users. As discussed previously, the number of users in all 
eight states we profiled was less than 6 percent of all taxpayers. Low 
usage also affects variable costs for purchases of system hardware and 
telecommunication services. Several states told us that they were able 
to mitigate additional capacity costs by building upon existing systems 
hardware. As reported in their feasibility report, California officials 
planned to build the CalFile system using the existing technical 
environment and noted that no additional software, hardware, or 
licenses would need to be procured. It was expected that all project 
expenditures would be for staff costs only. One contractor indicated 
that additional capacity was available to support increased usage, if 
needed, from other existing servers. Some states we profiled did not 
make significant changes to their current levels of taxpayer support 
because of the low usage rates. For instance, Maryland's taxpayer 
service group provided I-file training to the current staff but did not 
have any need to hire additional staff. 

Whether States Realize Benefits Greater Than Costs from Their I-file 
Systems Is Unclear: 

In all states profiled, whether benefits are greater than costs is 
unclear for two reasons. As previously noted (1) data on benefits and 
costs was incomplete and (2) based on available data, both benefits and 
costs were modest. 

Although incomplete, the available data combined with the decision by 
three states to discontinue their systems raise the possibility that in 
at least some states the benefits were less than costs. According to 
officials in two of the three states that discontinued their I-file 
systems, the benefits did not appear greater than costs and the system 
was not providing a good return on their investment. One agency 
official reported experiencing low usage and high costs. Officials with 
Iowa's Department of Revenue said the state had hoped to see major 
growth in electronic filing usage by introducing an I-file system, yet 
the system use peaked at 22,815 I-filed returns in 2004. Iowa officials 
estimated the system was costing about $7.00 per return. Like Iowa, 
Arkansas discontinued its I-file services. According to a state 
official, Arkansas's I-file system operated for 5 years beginning in 
tax year 2000 and processed a total of 5,149 returns. The highest usage 
was in 2005, with only 1,382 returns processed. 

Another example of a state in which the benefits may be less than the 
costs, based on reported information, is California. A study of the 
CalFile system revealed California overestimated benefits, expecting 
400,000 users in 2004 but getting 110,000. Further, the study 
highlighted that California underestimated costs with development costs 
expected to be $304,538 but coming in at $511,797. California officials 
estimated the agency saves approximately $1.00 per return in processing 
costs by converting paper returns to electronic returns. In 2004, 
California estimated 67,000 filers converted to electronic filing, 
which would have saved the agency $67,000. In the same year, California 
reported spending $256,362 on CalFile for development and operating 
costs. Consequently, based on reported information, benefits appear 
less than costs. However, additional benefits could have been realized 
from decreased math errors, for example, but the amount of such 
benefits is not known. California officials told us that CalFile may 
still be beneficial to the state because it provided another method of 
filing. 

Pennsylvania estimates show the benefits of its I-file system could 
exceed costs. Pennsylvania estimated $3.47 per return in cost savings 
for processing and administrative costs associated with converting 
paper to electronic filing. Between tax year 1999 and 2005, a total of 
1,362,867 taxpayers used the I-file system. Pennsylvania did not 
provide an estimate of the number of I-file users that converted from 
paper. However, if 28 percent of users converted from paper to e- 
filing, Pennsylvania would break even. If more than 28 percent 
converted, Pennsylvania could realize a net benefit. 

Achieving a Net Cost Savings for IRS Depends on the Cost of Developing 
the System and the Number of Paper Filers Converted: 

Providing federal taxpayers with an I-file system would be a new 
service for which IRS would incur new costs. Whether the additional 
costs of the new program could be offset by reduced costs from 
processing fewer paper returns depends on a number of factors, such as 
the costs of developing and operating the system and number of 
taxpayers converted from paper to I-file. 

Providing I-file Would Be a New Service with New Costs for IRS That 
Could Be Higher Than States' Costs: 

I-file would be a new service that IRS would provide for taxpayers. To 
develop the new service, IRS would have to (1) create or procure return 
preparation software for IRS's Web site and (2) extend direct e-filing 
to individuals, in which the return would be routed into the current 
stream of electronically filed returns coming in from EROs. 

IRS's fixed costs for I-file could be higher than the fixed costs of 
the states we profiled for several reasons. Currently, IRS's Web site 
is mostly informational, meaning taxpayers can obtain information from 
IRS but they cannot submit information to IRS's tax return databases. 
The information that taxpayers can obtain includes instructions, 
downloadable forms, and refund status. Developing an I-file system 
would require IRS to develop a transactional Web site, where taxpayers 
could enter information that would be submitted to IRS's tax return 
databases. Transactional Web sites require more security and other 
features not necessary for an informational Web site. 

Some of the states we profiled had transactional Web sites in place 
before they developed their I-file systems.[Footnote 11] Those states 
included Kansas, California, Indiana, and Utah. To provide I-file, IRS 
would need to incur the costs of developing a transactional capability. 

Other factors that could cause IRS's fixed costs to differ from the 
states' fixed costs include the relative complexity of the federal tax 
system, the types of taxpayers who are eligible, and the features of 
the I-file system, such as memory. The federal income tax system is 
more complex than states' tax systems, which generally piggyback on the 
federal return. For example, the federal Form1040 for tax year 2006 
contains 77 lines and can require up to 41 other forms, schedules, or 
worksheets to complete, while Maryland's Form 502 contains 52 lines 
(starting with federal adjusted gross income) and can require only 7 
other forms, schedules, or worksheets to complete. IRS could limit 
fixed costs by limiting taxpayer eligibility the way some states did. 
Limiting eligibility to more simple forms, such as the federal Form1040 
EZ, would reduce the complexity of I-file software. Similarly, the 
features offered on an I-file system would affect the complexity of the 
software. Features such as save and return and auto-populating can 
require additional memory and potentially increase costs. 

IRS's variable costs for an I-file system could also be higher than the 
states'. As previously noted, many of the states we profiled had low 
variable costs for computer hardware and taxpayer support because they 
were able to make use of existing capacity, either inside the tax 
agency or at other state agencies. Several states we profiled said that 
if their usage rates were significantly higher than current rates, they 
would incur additional costs to increase capacity. According to IRS 
officials, IRS does not have excess capacity that could be used to 
provide I-file services to taxpayers. As a consequence, IRS's variable 
costs per return for I-file services could be higher than the states'. 

Net Cost Savings Depends on the Number of Paper Filers Converted: 

The number of paper filers who convert to electronic filing can have a 
significant impact on the overall cost savings IRS could achieve by 
operating I-file. IRS data show, each paper return that is processed 
cost an estimated $2.65 per return in 2003, while each electronic 
return cost an estimated $0.29, resulting in an estimated cost savings 
of $2.36 per return processed electronically. However, we cannot 
independently verify this estimate and its basis is unclear because 
IRS's cost accounting system is not yet able to support preparation of 
such cost estimates.[Footnote 12]Additionally, other costs may be 
reduced by electronic filing including costs associated with math 
errors. Math errors on paper returns may be due to taxpayer error or 
IRS transcription errors. Both can result in notices being sent to 
taxpayers and phone contacts with taxpayers. Both types of errors are 
reduced by electronic filing. 

IRS could achieve a net cost savings if the costs saved by reduced 
paper processing were greater than the costs incurred from developing 
and operating an I-file system. The key to IRS achieving a net cost 
savings depends on the number of individuals converted from paper to 
electronic filing and the savings per return (estimated to be $2.36 per 
return by IRS). I-file users who previously electronically filed do not 
generate such savings. In 2006, 58.3 million tax returns (45 percent of 
all tax returns) were filed on paper. Any savings from reduced paper 
processing would have to be netted against the cost of the I-file 
system to determine whether cost savings were realized. 

The extent to which federal paper filers would convert to an I-file 
system is uncertain. According to respondents of an IRS Oversight Board 
survey,[Footnote 13] some taxpayers reported not feeling comfortable 
filing taxes electronically. These taxpayers reported not having 
confidence that the Internet is secure or that their privacy is 
protected. These taxpayers also cited other reasons including: the 
Internet was too complicated, or the taxpayer liked to use paper method 
or they didn't want to pay the electronic filing fee. An I-file system 
would address some of these taxpayer concerns but not all of them. For 
example, if taxpayers' security and privacy concerns are focused on 
third party transmitters, then an I-file system might mitigate the 
concerns.[Footnote 14]If the concerns are more general and apply to the 
Internet as a whole, then an I-file system (only accessible over the 
Internet) may not mitigate the concerns. Additionally, IRS's Free File 
service, which may be the existing service most similar to I-file had 
4.0 million users (about 3 percent of total taxpayers and 4 percent of 
eligible taxpayers) in 2006. This usage rate is an indication of the 
challenge of converting some taxpayers to electronic filing. 

The 13.6 million v-coders who self-prepared are an attractive target 
for an I-file program. Because v-coders prepare their return on a 
computer, they are presumably more comfortable with computers and may 
be more willing to try I-file than taxpayers who did not use a computer 
to prepare their returns. Because they file on paper, converting them 
to I-file results in reduced paper processing costs. V-coded returns 
prepared by paid preparers may be less susceptible to convert to I-file 
because these paid preparers have concerns about existing e-file 
options. Several of the states we profiled emphasized the importance of 
defining the target population when designing an I-file system. Whether 
such a narrowly defined population, as v-coders who self prepare, could 
be successfully targeted at the federal level is unclear. 

In addition to the net savings that could be realized from I-file, 
another factor that should be considered is whether IRS has the systems 
management capability needed to develop such a program. For well over a 
decade, IRS has been involved in a multibillion dollar effort to 
modernize its information systems. While IRS has made noteworthy 
progress improving its systems management capability, it has had a 
history of cost increases and schedule delays that led us to designate 
systems modernization as a high-risk area in 1995.[Footnote 15] Those 
cost increases and schedule delays were due, at least in part, to 
deficiencies in various management controls and capabilities that have 
not yet been fully corrected. In 2003, we noted that IRS had made 
significant progress in establishing management controls and 
foundational systems architecture.[Footnote 16]However, systems 
modernization remained at risk because the scope and complexity of 
modernization activities was increasing. In 2005, we reported that 
balancing the scope and pace of modernization activities with IRS's 
ability to manage them remained a challenge.[Footnote 17] IRS has made 
further progress since 2005 addressing concerns about systems 
management. However, critical management controls and capabilities have 
still not yet been fully implemented or institutionalized. Before 
proceeding with I-file, IRS would need to consider the impact of the 
program on its existing portfolio of systems development projects and 
the impact of the program on its current modernization vision and 
strategy. This would entail IRS determining whether it has the 
management capabilities to take on this new project and what, if any, 
ongoing and planned programs would need to be deferred. 

Agency Comments: 

In written comments on a draft of this report, the Commissioner of 
Internal Revenue said he appreciated our observations on the states' 
experiences with I-file systems. He summarized the facts presented in 
the report. He then went beyond our description of the facts to reach 
the conclusion that the facts support IRS's current strategy for 
growing electronic filing. 

The full text of the Commissioner's comments is reprinted in appendix 
IV. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after its date. At that time, we will send copies to other appropriate 
congressional committees and the Commissioner of Internal Revenue. The 
report is available at no charge on GAO's Web site at 
http://www.gao.gov. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
listed in appendix V. 

Signed by: 

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

[End of section] 

Appendix I: Individual Profiles: 

We profiled eight state tax agencies, two foreign tax agencies, and 
three federal agencies with I-file systems. The tables below (tables 7- 
19) contain information on the characteristics of individual agencies, 
taxpayer eligibility requirement for 2006, and the costs, benefits, and 
challenges associated with developing and operating I-file systems. 
Information on benefits and challenges was collected via structured 
interviews with open-ended questions. We are reporting information on 
eligibility found on agencies' Web sites.[Footnote 18] 

Table 7: California: 

Name of system: Type of system; 
CalFile: Web pages. 

Name of system: Year implemented; 
CalFile: 2003. 

Name of system: Total taxpayer population (2006); 
CalFile: 14,594,174. 

Name of system: Number of 2006 eligible I-file users; 
CalFile: 6.4 million. 

Name of system: Number and percent of 2006 I-file users based on total 
filers; 
CalFile: 111,436 (0.76 percent). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
CalFile: 111,436 (1.74 percent). 

Name of system: System developed and operated; 
CalFile: In-house developed and operated, and the server owned by the 
state. 

Name of system: Major features; 
CalFile: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications. 

Name of system: Eligibility criteria; 
CalFile: 
* Must be a California resident for the entire year; 
* Taxpayer is filing an original tax return for 2006; 
* Taxpayer can use any filing status that he/she qualify for; 
* Claim up to 5 dependents; 
* Taxpayer's federal adjusted growth income(AGI) can be up to $150,743 
(S & MFS), $226,119 (HOH), and $301,491 MFJ & qualifying widow(er); 
* Taxpayer's only income is from one or more of the following: 
- Wages, salaries, and tips reported on Form W-2; 
- Taxable scholarship and fellowship grants reported on Form W-2; 
- Interest and dividends reported on Form 1099-INT or 1099-DIV; 
- Unemployment compensation, paid family leave, and tax refund reported 
on Form 1099-G; 
- Fully and partially taxable IRA distributions, pensions, and 
annuities reported on Form 1099-R; 
- Tier 1 and tier 2 railroad retirement payments reported on Form RRB-
1099 or RRB-1099-R. 
- Social Security benefits reported on Form SSA-1099; 
- Gambling winnings reported on Form W-2G; 
- Alimony; 
* Taxpayer's only adjustments to income reported on their federal 
return (if any) are from one or more of the following: 
- Archer MSA deduction; 
- IRA deduction; 
- Moving expenses; 
- Penalty on early withdrawal of savings; 
- Alimony paid; 
- Student loan interest deduction; 
- Jury duty pay given to employer; 
* Taxpayer's only adjustments to federal AGI (if any) are from one or 
more of the following: 
- California income tax refund; 
- Nontaxable interest and ordinary dividends; 
- Unemployment compensation and/or paid family leave; 
- Social Security benefits; 
- Fully and partially taxable IRA distributions, pensions, and 
annuities; 
- Tier 1 and tier 2 railroad retirement payments; 
- California Lottery winnings; 
* Taxpayer can claim either the Standard deduction or Itemized 
deductions; 
* Taxpayer's California payments made are from one or more of the 
following: 
- Withholding shown on Form(s) W-2, W-2G, and 1099-R; 
- Estimated tax payments; 
- Payments made with an extension voucher; 
- Excess State Disability Insurance (SDI) or Voluntary Plan Disability 
Insurance (VPDI); 
- Refund from the previous year applied to 2006 estimated tax; 
* Taxpayers' only exemptions and credits claimed are one or more of the 
following: 
- Personal exemption credit; 
- Senior exemption credit; 
- Blind exemption credit; 
- Dependent exemption credit; 
- Nonrefundable renter's credit; 
- Child and dependent care expenses credit; 
* Taxpayer can use CalFile if: 
- Will get a refund; 
- Have no amount due; 
- Owe an amount. 

Source: GAO analysis of California's information. 

[End of table] 

* Total costs were $717,000 over 3 years. For years 2003-2005, one-time 
development costs were $512,000 and ongoing costs for operations were 
$205,000. 

* Reported benefits to the agency: 

- Increase in e-filing: 

- Fewer processing errors: 

- Increase in taxpayers paying via e-pay: 

- Faster payment processing: 

- Cost savings per I-filed return: 

* Reported benefits to the taxpayers: 

- Direct submission to tax agency/no third party involvement: 

- Faster refunds: 

* Reported challenges: 

- Tax preparation industry objections: 

- Ensuring security of the system: 

- Updates to system based on late tax law changes: 

Table 8: District of Columbia: 

Name of system: Type of system; 
Online Tax Filing Service: Web pages. 

Name of system: Year implemented; 
Online Tax Filing Service: 2002. 

Name of system: Total taxpayer population (2005); 
Online Tax Filing Service: 291,181. 

Name of system: Number of 2005 eligible I-file users; 
Online Tax Filing Service: Number not available. 

Name of system: Number and percent of 2005 I-file users based on 2005 
total filers; 
Online Tax Filing Service: 9,285 (3.19%). 

Name of system: Number and percent of 2005 I-file users based on 
eligible filers; 
Online Tax Filing Service: 9,285; percentage cannot be calculated. 

Name of system: System developed and operated; 
Online Tax Filing Service: Contractor developed and operated and owner 
of server unknown[A]. 

Name of system: Major features; 
Online Tax Filing Service: 
* Login/ create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields; 
* Status checks. 

Name of system: Eligibility criteria; 
Online Tax Filing Service: 
* Taxpayer must log on using their Social Security Number and the 
Federal AGI from the previous year's return; 
* Taxpayer must have filed a tax return the previous year. 

Source: GAO analysis of District of Columbia's information. 

[A] Officials with the District of Columbia Office of Tax and Revenue 
declined several requests for follow-up interviews. 

[End of table] 

* Total costs for development of the system were approximately $1 
million to $2 million with an annual maintenance fee of $480,000 for 
individual and business users. 

* Reported benefits to the agency: 

- Increase in e-filing: 

- Reduced paper processing and reduced paper processing staff: 

* Reported benefits to the taxpayers: 

- Confirmation of return receipt: 

- Ability to print a PDF copy of the return: 

- Direct deposit for refund: 

* Reported challenge: 

- Attracting taxpayers to use the system: 

Table 9: Indiana: 

Name of system: Type of system; 
I-file: Web pages. 

Name of system: Year implemented; 
I-file: 1998. 

Name of system: Total taxpayer population (2006); 
I-file: 3,039,782. 

Name of system: Number of 2006 eligible I-file users; 
I-file: Number not available. 

Name of system: Number and percent of 2006 I-file users based on 2006 
total filers; 
I-file: 83,422 (2.74%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
I-file: 83,422; percentage cannot be calculated. 

Name of system: System developed and operated; 
I-file: Contractor developed and operated, and the server owned by the 
contractor. 

Name of system: Major features; 
I-file: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields. 

Name of system: Eligibility criteria; 
I-file: 
* Taxpayer must have filed an individual return with the state of 
Indiana in the past; 
* This program will allow taxpayer to file IT-40, IT-40EZ, IT-40PNR, or 
IT-40RNR directly through the Internet; 
* Taxpayer first or last name must not have been legally changed since 
he/she last filed. 

Source: GAO analysis of Indiana's information. 

[End of table] 

* Total costs were not available. Contractors charged $1 per return for 
developing and operating the system, along with some marketing and 
technical taxpayer support. 

* Officials with the Indiana Department of Revenue declined several 
requests for interviews to discuss benefits and challenges associated 
with developing the I-file system. 

Table 10: Kansas: 

Name of system: Type of system; 
Webfile: Web pages. 

Name of system: Year implemented; 
Webfile: 2001. 

Name of system: Total taxpayer population (2006); 
Webfile: 1,420,149. 

Name of system: Number of 2006 eligible I-file users; 
Webfile: Number not available. 

Name of system: Number and percent of 2006 I-file users based on 2006 
total filers; 
Webfile: 50,999 (3.59%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
Webfile: 50,999; percentage cannot be calculated. 

Name of system: System developed and operated; 
Webfile: Contractor developed and operated, and the server owned by the 
contractor. 

Name of system: Major features; 
Webfile: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields; 
* Status checks. 

Name of system: Eligibility criteria; 
Webfile: 
* All Kansas residents and nonresidents who filed a Kansas income tax 
return last year can use WebFile, even to itemize; 
* Taxpayer may file an amended Kansas Individual income tax return (K-
40) using WebFile, but not an extension or a Homestead Refund Claim (K-
40H); 
* Taxpayer may not use WebFile if their Kansas adjusted gross income is 
greater than $9,999,999. 

Source: GAO analysis of Kansas' information. 

[End of table] 

* Total costs were not available. Contractors charged $1 per return for 
developing and operating the system, along with some marketing and 
technical taxpayer support. In 2006 and 2007, Kansas also received a 
marketing budget of $100,000 for marketing of Webfile and electronic 
filing. 

* Reported benefits to the agency: 

- Increase in electronically filed returns: 

- Fewer paper returns: 

- Fewer processing errors: 

- Cost savings: 

* Reported benefit to the taxpayers: 

- Less incidence of lost documentation: 

* Reported challenge: 

- Authentication of taxpayers: 

Table 11: Maryland: 

Name of system: Type of system; 
I-file: Web pages. 

Name of system: Year implemented; 
I-file: 2001. 

Name of system: Total taxpayer population (2006); 
I-file: 2,773,321. 

Name of system: Number of 2006 eligible I-file users; 
I-file: Number not available. 

Name of system: Number and percent of 2006 I-file users based on 2006 
total filers; 
I-file: 115,678 (4.17%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
I-file: 115,678; percentage cannot be calculated. 

Name of system: System developed and operated; 
I-file: In-house developed and operated, and the server owned by the 
state. 

Name of system: Major features; 
I-file: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields; 
* Status checks; 
* View prior years' information. 

Name of system: Eligibility criteria; 
I-file: 
* Maryland's Internet tax filing system allows online electronic filing 
of resident or nonresident personal income tax returns along with the 
most commonly associated schedules and forms; 
* Taxpayers are NOT eligible to use this system if: 
- Filing a Form 500CR; 
- Filing Form 515 for nonresident local tax; 
- Filing to amend a return that was previously filed on paper or 
another electronic source other than I-file; 
- Filing to amend a nonresident Form 505; 
- Filing married, separately or head of household and claiming spouse 
as a dependent taxpayer based on special conditions on the federal 
return; 
- Filing more than the number of forms allowed to I-file; 
(W2 Limit 50, W2G Limit 30, 502CR Limit 10, 1099G Limit 10 1099R Limit 
20). 

Source: GAO analysis of Maryland's information. 

[End of table] 

* Maryland did not track any of its costs separate from the operating 
budget for the Information Technology Division and Revenue 
Administration Division. They noted that most of their costs would be 
incurred in staff hours; however, none of their staff is specifically 
dedicated to the I-file system. 

* Reported benefits to the agency: 

- Reduced paper processing staff: 

- Less contact with taxpayers via telephone or notices: 

- Fewer processing errors: 

* Reported benefits to taxpayers: 

- Faster refunds: 

- Auto-population of W-2 information (state employees only): 

- Quicker preparation of return: 

* Reported challenges: 

- Compatibility of system with all user browsers: 

- Addressing taxpayers concerns about the security of their 
information: 

- Development and maintenance of the security platforms: 

Table 12: Pennsylvania: 

Name of system: Type of system; 
pa.direct.file: Web pages. 

Name of system: Year implemented; 
pa.direct.file: 2000. 

Name of system: Total taxpayer population (2006); 
pa.direct.file: 5,644,575. 

Name of system: Number of 2006 eligible I-file users; 
pa.direct.file: 1.5 million. 

Name of system: Number and percent of 2006 I-file users based on 2006 
total filers; 
pa.direct.file: 300,552 (5.32%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
pa.direct.file: 300,552 (20.04%). 

Name of system: System developed and operated; 
pa.direct.file: Contractor developed and the server owned and operated 
by the state. 

Name of system: Major features; 
pa.direct.file: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications. 

Name of system: Eligibility criteria; 
pa.direct.file: Taxpayer can report most types of income and claim the 
Tax Forgiveness credit - even if there are dependent children; 
However, pa.direct.file cannot process a return if the taxpayer: 
* Operated a business or profession and (1) report a loss or (2) have 
expenses over $2,500, which disqualify him/her from using PA Schedule C-
EZ; 
* Report income from a partnership or PA S-corporation unless 
distributed by a trust or estate; 
* Earned income from an installment sale (PA Schedule D-1); 
* Had a taxable gain to report on the sale of property purchased before 
June 1, 1971 (PA Schedule D-71); 
* Sold property in which the gross sales price is equal to zero (PA 
Schedule D); 
* Claim an out-of-state tax credit using PA Schedule G; 
* Incurred unreimbursed business expenses from working within and 
outside of Pennsylvania as a nonresident or part-year resident; 
* Claim a tax credit for PA Job Creation, PA Research and Development, 
or a Keystone Opportunity Zone (KOZ), KOEZ, or KOIZ Tax Credit; 
* Participated in the Employment Incentive Program and claim credit on 
PA Schedule W. 
* Are filing a return for a deceased person; 
* Derived income from farming; 
* Are filing for a taxable year other than 2006; 
* Amending a PA tax return if the original return was not filed on 
pa.direct.file; 
* Had expenses related to executor fees; 
* Had deductions for medical and health savings accounts; 
pa.direct.file can handle returns with: 
* Up to 20 
Forms W-2; 
* Unreimbursed business expenses for up to 4 employers (PA Schedule 
UE's); 
* Interest income reported on up to 40 1099's (PA Schedule A); 
* Dividend income reported on up to 40 1099's (PA Schedule B); 
* Sales of property for up to 60 transactions (PA Schedule D); 
* PA Estimated Installment Payments for tax year 2005; 
* Tax Forgiveness credit claimed on PA Schedule SP; 
* Income from rents, royalties, patents, or copyrights from up to 6 
different sources (PA Schedule E); 
* Supplemental information reported on up to 4 Statement Schedules; 
* Income from self-employment for each taxpayer --One PA Schedule C-EZ 
for each taxpayer; 
* Up to 35 items from trusts or fiduciaries (PA Schedule J); 
* Gambling & lottery winnings (one PA Schedule T); 
* Miscellaneous income from up to 12 different sources reported (PA 
Schedule MC). 

Source: GAO analysis of Pennsylvania's information. 

[End of table] 

* State officials estimated the system cost $400,000 to develop, 
$125,000 per year to operate, and $40,000 in improvements for the 
system. Officials also received between $20,000 - $40,000 to market the 
system for the first few years. 

* Reported benefits to the agency: 

- Reduced paper processing: 

- Faster return processing: 

- Improving customer service and satisfaction: 

* Reported benefits to the taxpayers: 

- Faster refunds: 

- Confirmation of return receipt: 

- Less incidence of lost documents: 

* Reported challenges: 

- Agreement among stakeholders: 

- Designing a user friendly, intuitive system: 

- Capacity needs during peak filing: 

Table 13: South Carolina: 

Name of system: Type of system; 
SCnetFile!: Web pages. 

Name of system: Year implemented; 
SCnetFile!: 1999. 

Name of system: Total taxpayer population (2006); 
SCnetFile!: 2,043,552. 

Name of system: Number of 2006 eligible I-file users; 
SCnetFile!: 1.5 million. 

Name of system: Number and percent of 2006 I-file users based on 2006 
total filers; 
SCnetFile!: 29,241 (1.43%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
SCnetFile!: 29,241 (1.95%). 

Name of system: System developed and operated; 
SCnetFile!: Contractor developed, state operated, and the server owned 
by the state. 

Name of system: Major features; 
SCnetFile!: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Auto-populate some fields. 

Name of system: Eligibility criteria; 
SCnetFile!: 
* Selected taxpayers are able to file their 2006 South Carolina 
individual income tax returns directly with the Department of Revenue 
over the Internet utilizing SCnetFile!. SCnetFile! is available to 
select full-year/part- year or nonresidents filing either SC1040 or 
SC1040A (short form) South Carolina returns; 
* SCnetFile! allows taxpayers that file federal Schedules C, D, E, and 
F to participate; 
* Taxpayers cannot file by SCnetFile! if they have information on the 
following lines: 
- Line 7 - 
Lump Sum Distribution (SC4972); 
- Line 8 - Active Trade or Business Income (I-335); 
- Line 12 - Other Non-refundable Credits (SC1040TC). 

Source: GAO analysis of South Carolina's information. 

[End of table] 

* Total costs were not documented; however, officials believed the 
development of the system cost several hundred thousand dollars, while 
maintenance of the system is expensed to the information technology 
department. 

* South Carolina officials did not report any specific benefits for the 
agency or taxpayers. 

* Reported challenges: 

- Attracting users to the system: 

- Maintaining current users to the system: 

Table 14: Utah: 

Name of system: Type of system; 
TaxExpress: Web pages. 

Name of system: Year implemented; 
TaxExpress: 2001. 

Name of system: Total taxpayer population (2005); 
TaxExpress: 1,004,919. 

Name of system: Number of 2005 eligible I-file users; 
TaxExpress: Number not available. 

Name of system: Number and percent of 2005 I-file users based on 2005 
total filers; 
TaxExpress: 25,267 (2.51%). 

Name of system: Number and percent of 2005 I-file users based on 
eligible filers; 
TaxExpress: 25,267; percentage cannot be calculated. 

Name of system: System developed and operated; 
TaxExpress: Contractor developed and operated, and the server owned by 
the contractor. 

Name of system: Major features; 
TaxExpress: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Status checks. 

Name of system: Eligibility criteria; 
TaxExpress: TaxExpress is designed for the most frequent tax 
situations. Taxpayers can use TaxExpress if all the following 
statements are true: 
* Federal AGI is $100,000 or less; 
* Taxpayer was Utah resident for the entire year; 
* Taxpayer claim the federal standard deduction (not itemized 
deductions); 
* Taxpayer does not claim any Utah tax credits, such as At Home Parent 
credit; 
* Taxpayer does not claim other deductions from income; 
* Taxpayer is not filing an amended Utah return; 
* Taxpayer has 10 or fewer W-2 and/or 1099 forms showing Utah income 
and withholding. (If there is out-of-state withholding, taxpayer cannot 
use TaxExpress); 
* Taxpayer do not claim a credit for taxes paid to another state; 
* Taxpayer filed a 2005 Utah resident return. 
TaxExpress may not be the best filing option if: 
* Taxpayer (or spouse) was a nonresident or a part- year Utah resident; 
* Taxpayer (or spouse) are under age 65 and qualify for the Retirement 
Income Deduction; 
* Taxpayer need to claim an exemption for providing housing for persons 
displaced by Hurricane Katrina and filed IRS form 8914; 'Using 
TaxExpress in these cases may cause taxpayer to have a higher tax 
liability. 

Source: GAO analysis of Utah's information. 

[End of table] 

* Total costs were not captured. Contractors charged the state of Utah 
$0.75 per return to develop and operate the system along with some 
marketing and technical taxpayer support. 

* Reported benefits to the agency: 

- Increase in electronically filed returns: 

- Reduced paper processing: 

- Reduced paper processing staff: 

* Reported benefits to the taxpayers: 

- Faster refunds: 

- Another electronic filing option: 

* Reported challenges: 

- Ensuring the stability of system during the first year roll-out: 

- Authentication of taxpayers: 

Table 15: Department of Agriculture: 

Name of system: Type of system; 
eForms: PDF Fillable Forms. 

Name of system: Year implemented; 
eForms: 2002. 

Name of system: Total population; 
eForms: Number not available. 

Name of system: Number of 2006 eligible I-file users; 
eForms: Number not available. 

Name of system: Number and percent of 2006 applicants based on total 
applicants; 
eForms: 4,398; percentage cannot be calculated. 

Name of system: Number and percent of 2006 applicants based on eligible 
applicants; 
eForms: 4,398; percentage cannot be calculated. 

Name of system: System developed and operated; 
eForms: In-house developed and operated, and the server owned by the 
agency. 

Name of system: Major features; 
eForms: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Status checks. 

Name of system: Federal benefit program; 
eForms: Allows Farm Service Agency (FSA), Natural Resources 
Conservation Service (NRCS), and Rural Development (RD) applicants to 
find forms and instructions and then complete and submit the forms to 
the agency. 

Name of system: Eligibility criteria; 
eForms: 
* Level 1 access: Limited access to USDA Web site portals and 
applications that have minimal security requirements. Note: Level 1 
access is limited and does not allow applicant to conduct official 
electronic business transactions with the USDA via the Internet; 
* Must have user identification, password, profile, and valid email 
address; 
* Registering for an account with Level 1 access is easy. The applicant 
will create a brief customer profile, user identification, password, 
that he/she can remember and respond to the confirmation email within 7 
days. Note: Applicant must have a valid email address to register for 
an account with Level 1 access; 
* Level 2 access: Access to all the portals and applications that are 
covered by an account with Level 2 access and also provides the ability 
to conduct official electronic business transactions with the USDA via 
the Internet; 
* Applicant must visit the nearest USDA Service Center in person and 
prove identity with a current state driver's license, state photo ID, 
U.S. Passport or U.S. military ID. Applicant's first and last names 
must be entered exactly as they appear on the government-issued photo 
ID that will be taken to the Service Center to prove applicant's 
identity; 
* Create a password that applicant will remember. The password must be 
a minimum of 4 characters and cannot exceed 10; 
* Applicant must respond to the confirmation email before going to the 
Service Center, or the Service Center employee will not be able to 
activate the account; 
NOTE: Once the applicant presents their government issued photo ID at a 
local USDA Service Center and the account is activated, they will be 
required to update the password at their next login to meet Level 2 
access password requirements. 

Source: GAO analysis of USDA's information. 

[End of table] 

* Total costs for development was $600,000, with $350,000 for a special 
license from Adobe, $50,000 for maintenance and $200,000 for forms 
technology, research, and piloting the initial system. 

* Reported benefits to agency: 

- Higher than anticipated electronically filed applications: 

- Transmission of forms internally (USDA employees only): 

* Reported benefits to applicants: 

- None reported: 

* Reported challenge: 

- User authentication: 

Table 16: Department of Education: 

Name of system: Type of system; 
Free Application for Federal Student Aid (FAFSA): Web pages. 

Name of system: Year implemented; 
Free Application for Federal Student Aid (FAFSA): 1997. 

Name of system: Total population; 
Free Application for Federal Student Aid (FAFSA): 13,852,805. 

Name of system: Number of 2006 eligible I-file users; 
Free Application for Federal Student Aid (FAFSA): Number not available. 

Name of system: Number and percent of 2006 applicants based on total 
applicants; 
Free Application for Federal Student Aid (FAFSA): 11,308,161; (81.63%). 

Name of system: Number and percent of 2006 applicants based on eligible 
applicants; 
Free Application for Federal Student Aid (FAFSA): 11,308,161; 
percentage cannot be calculated. 

Name of system: System developed and operated; 
Free Application for Federal Student Aid (FAFSA): Contractor developed 
and operated and the server owned by the agency. 

Name of system: Major features; 
Free Application for Federal Student Aid (FAFSA): 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields; 
* Status checks. 

Name of system: Federal benefit program; 
Free Application for Federal Student Aid (FAFSA): Allows students to 
file financial aid applications online. 

Name of system: Eligibility criteria; 
Free Application for Federal Student Aid (FAFSA): To be eligible to 
receive federal student aid, applicant must meet certain requirements. 
Taxpayer must: 
* Be a U.S. 
citizen or eligible non-citizen; 
* Have a valid Social Security Number (unless from the Republic of the 
Marshall Islands, the Federated States of Micronesia, or the Republic 
of Palau); 
* Comply with Selective Service registration, if required (see 
www.sss.gov for more information); 
* Have a high school diploma or a General Education Development (GED) 
Certificate or pass an approved ability-to-benefit (ATB) test; 
* Be enrolled or accepted for enrollment as a regular student working 
toward a degree or certificate in an eligible program at a school that 
participates in the federal student aid programs; 
* Applicant must not owe a refund on a federal grant or be in default 
on a federal student loan; 
* Applicant must have financial need (except for unsubsidized Stafford 
Loans); 
* Applicant must not have certain drug convictions; 
* Other requirements may apply; 
Applicant must contact their school's financial aid office for more 
information. 

Source: GAO analysis of Department of Education's information. 

[End of table] 

* Total costs not reported. 

* Reported benefit to agency: 

- High percentage of electronic applications: 

* Reported benefits to applicant: 

- Helped users avoid errors: 

- Provided quicker application processing: 

* Reported challenges: 

- Stakeholder agreement: 

- System stability and capacity during peak filing: 

Table 17: Department of Veterans Affairs: 

Name of system: Type of system; 
Veterans Online Application (VONAPP): Web pages. 

Name of system: Year implemented; 
Veterans Online Application (VONAPP): 2000. 

Name of system: Total population; 
Veterans Online Application (VONAPP): Number not available. 

Name of system: Number of 2006 eligible I-file users; 
Veterans Online Application (VONAPP): Number not available. 

Name of system: Number and percent of 2006 applicants based on total 
applicants; 
Veterans Online Application (VONAPP): 144,220; percentage cannot be 
calculated. 

Name of system: Number and percent of 2006 applicants based on eligible 
applicants; 
Veterans Online Application (VONAPP): 144,220; percentage cannot be 
calculated. 

Name of system: System developed and operated; 
Veterans Online Application (VONAPP): Contractor developed and operated 
and the server owned by the agency. 

Name of system: Major features; 
Veterans Online Application (VONAPP): 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Auto populate some fields; 
* Ability to save and return to form; 
* View prior years' applications. 

Name of system: Federal benefit program; 
Veterans Online Application (VONAPP): Allows veterans to apply for 
benefits using the Internet. 

Name of system: Eligibility criteria; 
Veterans Online Application (VONAPP): If applying for Compensation, 
Pension, or Vocational Rehabilitation: 
Applicant should use VONAPP if they are a U.S. military veteran who 
wants to apply for compensation, pension, or vocational rehabilitation 
benefits using the Internet; 
VA Compensation Benefits; 
Applicant may apply if: 
* Injured while in the service, or; 
* Permanently and totally disabled and applicant believes that it is 
because of military service, or; 
* Seriously ill while in the service, and applicant believes they have 
continuing problems, or; 
* Developed a mental or physical condition that they believe may be 
related to military service; 
VA Disability Pension; 
Applicant may apply if: 
* Permanently and totally disabled but not as a result of military 
service, and; 
* Served on active duty during a wartime period, and; 
* Income is limited. 
Vocational Rehabilitation Benefits; 
Applicant should apply if: 
* Applicant is a veteran or a service member awaiting a disability 
discharge; 
* Applicant has a VA combined service- connected disability rating of 
10 percent or more; 
* Applicant believes disability is due to military service and have an 
application pending for service connection or are filing one with a 
vocational rehabilitation claim; 
VA Education Benefits; 
Applicant should apply if: 
* They believe they are eligible for benefits based upon active- duty 
service or if currently a member of the Selected Reserve. There are 
many categories of eligibility. For specific details, see the help text 
in the VONAPP application. 

Source: GAO analysis of Department of Veterans Affairs' information. 

[End of table] 

* Total costs of developing this system was $355,000 with additional 
associated costs of about $3,500. The annual maintenance contract is 
$40,000. 

* Reported benefits to agency: 

- None reported: 

* Reported benefit to applicants: 

- First time electronic application process: 

* Reported challenge: 

- Lack of electronic signature functionality requires extensive paper 
processing: 

Table 18: France: 

Name of system: Type of system; 
TeleIR: Web pages. 

Name of system: Year implemented; 
TeleIR: 2002. 

Name of system: Total taxpayer population; 
TeleIR: 35,000,000[A]. 

Name of system: Number of 2006 eligible I-file users; 
TeleIR: Number not available. 

Name of system: Number and percent of 2006 I-file users based on total 
filers; 
TeleIR: 5,700,000 (16.29%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
TeleIR: 5,700,000; percentage cannot be calculated. 

Name of system: System developed and operated; 
TeleIR: In-house developed and operated, and the server owned by 
France. 

Name of system: Major features; 
TeleIR: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields; 
* View prior years' information. 

Name of system: Eligibility criteria; 
TeleIR: 
* Open to residents and non-residents with previous filing history; 
* No first time users; 
* No income or deduction restrictions. 

Source: GAO analysis of France's information. 

[A] Approximate, according to agency. 

[End of table] 

* Total costs were not tracked separately from entire revenue system. 

* Reported benefits to the agency: 

- Fewer processing errors: 

- Fewer paper returns: 

* Reported benefits to the taxpayers: 

- Productive, modern system for filing taxes: 

- Increase in quality of service: 

- Real-time responses to questions: 

* Reported challenges: 

- Ensuring continued system performance: 

Table 19: United Kingdom: 

Name of system: Type of system; 
Self Assessment Online: Web pages. 

Name of system: Year implemented; 
Self Assessment Online: 2000. 

Name of system: Total taxpayer population; 
Self Assessment Online: 9,000,000[A]. 

Name of system: Number of 2006 eligible I-file users; 
Self Assessment Online: Number not available. 

Name of system: Number and percent of 2006 I-file users based on total 
filers; 
Self Assessment Online: 2,000,000 (22.22%). 

Name of system: Number and percent of 2006 I-file users based on 
eligible filers; 
Self Assessment Online: 2,000,000; percentage cannot be calculated. 

Name of system: System developed and operated; 
Self Assessment Online: Contractor developed and operated, and the 
server owned by the contractor. 

Name of system: Major features; 
Self Assessment Online: 
* Login/create account; 
* Perform calculations; 
* Hyperlinked to other forms and publications; 
* Ability to save and return to form; 
* Auto-populate some fields; 
* Status checks. 

Name of system: Eligibility criteria; 
Self Assessment Online: Taxpayers can only use Self Assessment Online 
to file a current year tax return; 
Self Assessment Online is available to: 
* Individuals who receive a Self Assessment Tax Return (SA100) or 
Notice to complete a tax return; 
* Partnerships who receive a Self Assessment Tax Return (SA800) or 
Notice to complete a tax return; 
* Trusts who receive a Self Assessment Tax Return (SA900) or Notice to 
complete a tax return; 
* Agents on behalf of their clients (who are individuals, partnerships 
or trusts); 
* Individuals, Agents, or Trustees who wish to view their Self 
Assessment Statement of Account, Liabilities and Payments, and choose 
to receive notifications and reminders by email or text message. 
Taxpayers can file Self Assessment Tax Returns (SA100, SA800 and SA900) 
and supplementary pages over the Internet; 
Taxpayers cannot use the service: 
* To file Estate, Nonresident, Companies, or Self Administered Pension 
Schemes Returns; 
* If they have already filed a tax return for the current tax year; 
* To correct a return already filed; 
* To file a previous year's return. 

Source: GAO analysis of United Kingdom's information. 

[A] Approximate, according to agency. 

[End of table] 

* Total costs were not available. 

* Reported benefits to the agency: 

- Reduced paper processing: 

- Reduced paper postage, printing, and storage costs: 

- Fewer processing errors: 

* Reported benefits to taxpayers: 

- Quicker and easier tax return preparation: 

- Met expectations of having on-line services: 

* Reported challenges: 

- Capacity needs during peak filing times: 

- Negotiating IT contracts: 

[End of section] 

Appendix II: One-time, Ongoing, Variable, and Fixed Costs: 

The costs of developing and operating an I-file system can 
characterized in several ways. Some types of costs are incurred one- 
time; other types of costs will recur consistently over time (ongoing). 
In addition, some costs can be considered to be variable in that they 
depend on the number of users of the system, while other types of costs 
can be considered to be fixed--independent of the number of users of 
the system. Table 20 shows the types of one-time/ongoing and fixed/ 
variable costs that may be incurred to develop and operate an I-file 
system. 

Table 20: Types of One-Time and Ongoing Costs Agencies Can Incur When 
Developing and Operating an I-file System: 


Development; 
One-time: Fixed: 
* Initial system development (design, planning, construction, 
installation, project management, testing); 
* Project oversight; 
* Facility modifications resulting from project; 
One-time: Variable: 
* Initial equipment purchases for hardware, bandwidth, and personal 
computers; 
Ongoing: Fixed: * Updates to system based on tax law changes; 
Ongoing; Variable: N/A. 

Operating; 
One-time: Fixed: N/A; 
One-time: Variable: N/A; 
Ongoing: Fixed: 
* Facility overhead; 
* System oversight; 
* Software maintenance; 
* Licensing fees; 
* Hardware maintenance; 
* Ongoing system maintenance; 
Ongoing: Variable: 
* Expanded capacity purchases for hardware, bandwidth, etc; 
* Internet/browser support; 
* Application support. 

Marketing; 
One-time: Fixed: 
* Development of logo or brand that is used over multiple years; 
* Marketing consultants; 
One-time: Variable: 
N/A; 
Ongoing: Fixed: 
* Radio or television advertising; 
Ongoing: Variable: * Printed flyers, booklets, etc. 

Taxpayer support; 
One-time: Fixed: 
N/A; 
One-time: Variable: 
* Training for staff for initial use of program; 
Ongoing: Fixed: N/A; 
Ongoing: Variable: 
* IT help desk support; 
* Training for staff based on yearly updates; 
* Telecommunications. 

Source: GAO analysis. 

Note: N/A is not applicable. 

[End of table] 

[End of section] 

Appendix III: Objectives, Scope, and Methodology: 

To identify the options available to IRS for developing an I-file 
system, we conducted literature searches and examined Web sites for all 
states, 75 executive and independent branch agencies, and two studies 
listing foreign countries with e-filing services. We also interviewed 
representatives from the IRS Oversight Board,[Footnote 19] Federation 
of Tax Administrators (FTA),[Footnote 20]four government contractors 
(Adobe, EZGov, NIC Inc., and Pearson Government Solutions), and the 
Electronic Tax Administration Advisory Committee (ETAAC). 

To identify the universe of states with I-file systems, we reviewed the 
Web sites of all 50 states and the District of Columbia. We found 20 
states and the District of Columbia provided I-file services. Of the 
remaining 30 states, we found 3 discontinued their I-file program, 9 
had no state income tax,[Footnote 21] and 18 relied on other 
technologies, such as 2-D barcode. 

For data on I-file usage rates, we used data from FTA's annual state 
individual income tax filings reports for 1998-2006. FTA annually 
surveys states on their paper and electronic filing figures. We 
reviewed FTA's methodology for collecting the data but did not verify 
all the numbers reported by states to FTA. However, we corroborated 
some of FTA's data with our data on six of the eight states we 
profiled. We found one discrepancy with the state of Utah due to a 
definitional misunderstanding. We corrected the inaccuracy using the 
state's data. We used this data as background for reporting and 
determined that the data were sufficiently reliable for this report. 

To determine the benefits and costs of I-file systems, we developed in- 
depth profiles of eight state tax agencies (California, District of 
Columbia, Indiana, Kansas, Maryland, Pennsylvania, South Carolina, and 
Utah) to illustrate the range of Internet filing systems, types of 
features, and level of usage. In less depth, we collected information 
about two foreign tax agencies and three federal agencies with I-file 
systems. We used the following criteria to select our eight state tax 
agencies to profile: (1) number of I-file users (based on data from the 
Federation of Tax Administrators), (2) year I-file system implemented, 
(3) contractor or in-house developed, and (4) types of features 
offered. We selected the states to have a range for each one of our 
criteria. We selected tax agencies in two foreign countries (United 
Kingdom and France) based primarily on their having a large volume of 
users. We selected three federal agencies (Department of Agriculture, 
Department of Education, and Department of Veterans Affairs) that allow 
individuals to prepare and submit forms on agencies' Web sites and have 
a range of features, users, and technologies. 

We developed a data collection instrument and conducted structured 
interviews to collect information on agency benefits and costs 
associated with developing and operating I-file systems. We asked open- 
ended questions about usage rates, system features, eligibility 
requirements, benefits to agencies and taxpayers, and system costs. We 
interviewed state tax, foreign tax, and federal agency officials and 
contractors with the California Franchise Board, District of Columbia 
Office of Tax and Revenue, Indiana Department of Revenue, Kansas 
Department of Revenue, Comptroller of Maryland, Pennsylvania Department 
of Revenue, South Carolina Department of Revenue, Utah State Tax 
Commission, the United Kingdom Her Majesty's Revenue and Customs, and 
the France General Tax Directorate. We talked to contractors, program 
directors, program staff, IT staff for the Department of Agriculture's 
Rural Development office, the Department of Education, and the 
Department of Veterans Affairs' Office of Compensation and Pension 
Service. We analyzed and summarized our information and confirmed the 
accuracy of our analysis and summaries with the appropriate state tax, 
foreign tax, and federal agency officials. 

We used widely accepted economic definitions of benefits and costs and 
corroborated these definitions with state officials, IRS officials, the 
IRS Oversight Board, ETAAC, and FTA. 

To determine benefits, we asked for information on savings from reduced 
paper processing, reduced error rates, improvements in processing time 
and refund issuance, the number of I-file users, and the number of 
taxpayers converted from paper filing to I-file. When benefit 
information was not measured in dollars, we asked for other available 
quantitative measures, such as time saved. In cases where tangible 
measures of benefits were not available, we asked for qualitative 
descriptions. We corroborated benefit information reported by the 
contractors, the IRS Oversight Board, and FTA with information provided 
by the states profiled. By profiling eight states, we saw consistency 
in the types of benefits reported. However, we did not verify the 
amount of cost savings reported by state agencies, but based on 
previous GAO work and discussions with state agency and IRS officials 
for this engagement, we understand that electronic filing reduces the 
number of processing staff needed, for example, and generates dollar 
savings. We determined that state estimates of savings per return are 
sufficiently reliable as a general indicator, but not necessarily as a 
precise indicator, of savings. 

To determine costs, we summarized costs on a total cost basis and per 
return basis. We distinguished between fixed and variable costs and 
summarized the factors influencing each. We asked for information on 
development costs, operating costs, marketing costs, and taxpayer 
support (help desk) costs. No state could give us complete information 
on costs. For example, no state had information on planning costs, or 
where applicable, contract management costs. However, the cost 
information we were able to gather covered large elements of total 
costs, such as development and operating costs. In such cases, we asked 
for definitions of terms, dates covered, and other available 
information about the estimates. Seven of the eight state tax agencies 
could not provide supporting documentation. California was the one 
state with extensive documentation on its system's benefits and costs 
including a feasibility study, a post-implementation evaluation, and a 
project overview. 

For states that relied on contractors, we asked state officials for 
information about contract costs. We corroborated information provided 
on contractor fees per return by interviewing contractors and reviewing 
contracts. We obtained copies of the contracts for Kansas, Indiana, and 
Utah from state agency Web sites and publicly available documents. The 
contracts documented the fee per tax return paid by those states to the 
contractor for I-file services. 

Because the available state data were incomplete and not always 
documented, the total costs that we calculated can only be interpreted 
as rough orders of magnitude. Based on the consistency in what was 
reported from the eight states, we determined that the data were 
reliable for estimating the rough magnitude of total costs. 

To determine the reliability of IRS's processing cost estimates for 
paper and electronic filing, we reviewed agency spreadsheets that 
support the estimates and interviewed knowledgeable officials. We spoke 
with IRS officials in the Electronic Tax Administration and W&I's 
Strategy and Finance about costs included in paper processing and 
electronic filing costs. These costs include pipeline processing costs, 
labor, oversight with management and supervision, and non-pipeline 
processing activities including quality assurance. Because of long 
standing limitations in IRS's cost accounting capability, cost data at 
this detailed level has not been audited.[Footnote 22] Based on prior 
reports about staff savings from electronic filing, we determined that 
IRS's estimate of savings per return is sufficiently reliable as a 
general indicator, but not necessarily as a precise indicator, of 
savings. 

To describe the potential for IRS to realize cost savings from 
providing an I-file service, we compared the types of costs states 
incurred with the types of costs IRS would likely face in developing 
and operating an I-file system. We identified (1) the segments of the 
taxpayer population who may be potential I-file users, (2) the 
potential for net cost savings, and (3) the likelihood federal paper 
filers would convert to an I-file system. We reviewed the IRS Oversight 
Board's Taxpayer Customer Service and Channel Preference Survey, 
November 2006, to determine why federal taxpayers do not file returns 
electronically. Because of the low response rate to this survey, the 
survey results we report cannot be used to make inferences about the 
views of all U.S. taxpayers. Instead, the results we present should be 
interpreted as representing the 1,101 taxpayers who responded to the 
survey. GAO did not assess the extent to which these respondents over- 
or under-represent certain segments of the U.S. taxpayer population in 
terms of such characteristics as age, income, education level, race, or 
Hispanic origin. We reviewed agency documentation on cost savings 
associated with reduced paper processing. We reviewed prior GAO 
reports[Footnote 23] to determine management capacity for overseeing 
previous IT projects and IRS's history of management challenges. 

We performed our work from May 2006 through March 2007 in accordance 
with generally accepted government auditing standards. 

[End of section] 

Appendix IV: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

Commissioner: 

April 2, 2007: 

Mr. James R. White: 
Director, Tax Issues: 
U.S. Government Accountability Office: 
441 G. Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. White: 

I have reviewed your draft report entitled "Taxpayer Services: State 
Experiences Indicate IRS Would Face Challenges Developing an Internet 
Filing System with Net Benefits," in which you provided information 
regarding the experiences of selected states, federal agencies, and 
countries in developing internet filing systems (I-file). 

Your report reflects that, despite some apparent savings and conversion 
of some taxpayers to electronic filing, the states you reviewed 
reported very low usage of their (-file systems. In some cases, the low 
usage experienced by the states significantly contributed to those 
states reporting that the costs to develop and operate their I-file 
systems were relatively low compared to their annual agency budgets. 
Many of the states you reviewed acknowledged that, because of the 
limited usage of their I-file systems, they were able to use existing 
equipment and other resources, rather than having to make expensive 
investments in additional hardware and infrastructure. Likewise, a 
number of the states whose experiences are included in your report were 
able to minimize development and operation costs by limiting the 
features their systems offer and by applying restrictive eligibility 
requirements to use them. As a result of the low usage their I-file 
systems experienced, your report notes that three states that developed 
I-file systems eventually discontinued them because of a combination of 
low usage and high costs. 

I appreciate your acknowledgement that, even without the benefit of the 
experiences of the states you reviewed, when considering the potential 
associated with IRS developing an I-file system, one must consider many 
more factors than would likely have been faced by the states. For 
example, as you note, the federal tax system and federal tax returns 
are more complex than the states and IRS fixed and variable costs would 
be substantially higher than those incurred by the states. The scale of 
any such system implemented by IRS would inevitably require significant 
investments in hardware, software, and business process redesign, and 
such an effort would have to be prioritized in the context of all the 
other modernization projects IRS is in the process of delivering. Other 
critical issues that must be taken into account when considering 
development of an I-file system by IRS include taxpayer security and 
privacy, ongoing maintenance and continuous upgrades to keep pace with 
changes in the tax laws, and the impact of such an effort on IRS 
operations and IRS' portfolio of enterprise improvement projects. 

All of these considerations, especially when viewed in conjunction with 
the experiences of the states, federal agencies, and countries included 
in your report, make a very compelling case for IRS' current strategy 
to develop, market and grow electronic filing. Under this strategy, 
which capitalizes on the competitive energy of the tax preparation 
software industry, IRS has created and sustained momentum toward 
achieving our electronic filing goals. Under this same strategy, by 
partnering with leading tax preparation software companies through such 
efforts as the Free File Alliance, taxpayers meeting certain income 
criteria, who otherwise might not be able to do so, can now 
electronically file their returns at no charge. 

Once again, I appreciate your observations on the states' experiences 
with development of I-file systems, and if you have any questions, 
please contact me or Floyd Williams, Director, Legislative Affairs, at 
(202) 622-3720. 

Sincerely, 

Signed by: 

Mark W. Everson: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Acknowledgments: 

In addition to the person named above, Signora J. May, Assistant 
Director; Michele Fejfar; Evan Gilman; Robyn Howard; Rich Hung; 
Veronica Mayhand; Donna Miller; Ed Nannenhorn; Cheryl Peterson; 
Gabriele Tonsil; and Tina L. Younger made key contributions to this 
report. 

FOOTNOTES 

[1] Tennessee and New Hampshire levy individual income taxes on certain 
interest and dividend income only. Both states offer an I-file service 
for this tax. 

[2] For the purposes of this report, we refer to the District of 
Columbia's Office of Tax and Revenue as a state tax agency. 

[3] The Free File Alliance had 17 members in 2002 and 20 members in 
2007. 

[4] The Free File Program income requirement was raised to $52,000 for 
2007. IRS estimates 70 percent of taxpayers qualify for Free File. 

[5] The 2-D barcode technology uses software to prepare the tax return, 
but when the return is printed, a horizontal and vertical bar code 
containing the information (for example, name, social security number) 
is imprinted on the paper. The taxing authority then scans the return, 
captures the data, decodes the data, and processes the return as if it 
had been sent electronically if the 2-D barcode contains all the 
pertinent information on the return. 

[6] A Portable Document Format (PDF) is an electronic document that 
must be read using a PDF reader application, such as Adobe Reader. 

[7] HTML (Hypertext Markup Language) is the software language used on 
the Internet's World Wide Web. HTML is used for creating World Wide Web 
pages. 

[8] This is referred to as the save and return feature. 

[9] The Maryland system prepopulates some tax information for state 
employees. 

[10] California's Franchise Tax Board's Budget for 2004-2005 was $466 
million. 

[11] While state agencies incurred one-time costs for developing 
transactional Web sites, the costs were not a part of the agencies' 
decision to implement the state's I-file system. 

[12] GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005 Financial 
Statements, GAO-07-136 (Washington, D.C.: Nov. 9, 2006), and Tax 
Administration: IRS Improved Performance in the 2004 Filing Season, But 
Better Data on the Quality of Some Services Are Needed, GAO-05-67 
(Washington, D.C.: Nov. 15, 2006). 

[13] IRS Oversight Board Taxpayer Customer Service and Channel 
Preference Survey, November 2006. 

[14] Of the eight states we profiled, five used contractors to operate 
and maintain their I-file systems. See appendix I for more details. 

[15] GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington, D.C.: 
Feb. 1, 1995). 

[16] GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: 
January 2003). 

[17] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005). 

[18] France's eligibility information was collected from the structured 
interview. 

[19] The IRS Oversight Board, created by the IRS Restructuring and 
Reform Act of 1998 (RRA 98), oversees the IRS in its administration, 
management, conduct, direction, and supervision of the execution and 
application of the internal revenue laws. 

[20] The Federation of Tax Administrators (FTA) was organized in 1937 
to improve the quality of state tax administration by providing 
services to state tax authorities and administrators. FTA serves the 
principal tax collection agencies of the 50 states, the District of 
Columbia, Puerto Rico, and New York City. 

[21] Alaska, Florida, Nevada, South Dakota, Texas, Washington, and 
Wyoming do not levy individual income taxes. Tennessee and New 
Hampshire levy individual income taxes on certain interest and dividend 
income and both states offer an I-file service for this tax. 

[22] GAO-07-136. 

[23] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: 
January 2007); High-Risk Series: An Update, GAO-05-207 (Washington, 
D.C.: January 2005); High-Risk Series: An Update, GAO-03-119 
(Washington, D.C.: January 2003); High-Risk Series: An Overview, GAO/ 
HR-95-1 (Washington, D.C.: February 1995); and Business Systems 
Modernization: Internal Revenue Service's Fiscal Year 2007 Expenditure 
Plan, GAO-07-247 (Washington, D.C.: Feb. 15, 2007). 

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