Tax Administration:

IRS Improved Some Filing Season Services, but Long-term Goals Would Help Manage Strategic Trade-offs

GAO-06-51: Published: Nov 14, 2005. Publicly Released: Nov 14, 2005.

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During the filing season, the Internal Revenue Service (IRS) processes about 130 million individual tax returns, issues refunds, and responds to millions of inquiries. Budget cuts combined with IRS's strategy of shifting resources from taxpayer service to enforcement make providing quality service a challenge. GAO was asked to assess IRS's 2005 filing season performance compared to past years and 2005 goals in the processing of paper and electronic tax returns, telephone service, face-to-face assistance, and Web site service. GAO also examined whether IRS has long-term goals to help assess progress and guide in making decisions. Finally, GAO summarized IRS's response to Hurricanes Katrina and Rita, and their possible effects on IRS's performance.

IRS improved some filing season services. According to officials, IRS made a strategic decision to reduce others to accommodate budget cuts. IRS's processing of returns and refunds went smoothly. Accuracy of responses to telephone inquiries about tax law and about taxpayers' accounts significantly improved. And, IRS's Web site performed well. On the other hand, in response to budget cuts, IRS reduced access to telephone assistors, resulting in longer wait-times and more callers hanging up. IRS officials viewed telephone access as a more flexible area for absorbing budget cuts than, for example, processing. The number of taxpayers visiting IRS walk-in sites continued to decline, while the number of tax returns prepared at volunteer sites increased. This is consistent with IRS's strategy of reducing the number of its employees providing expensive face-to-face assistance. IRS continues to lack reliable data on the accuracy of walk-in and volunteer site assistance but has plans in place to improve quality measurement. For the first time, more than half of individual tax returns were filed electronically, which is important because electronic filing has allowed IRS to reduce resources devoted to processing paper returns. However, despite IRS's actions to promote electronic filing, it is not on track to achieve its long-term goal of having 80 percent of such returns filed electronically by 2007. State mandated electronic filing has proven effective at encouraging electronic filing at the federal level and one IRS advisory group has recommended a federal mandate. However, little is known about the costs and burdens of such mandates. IRS has been developing long-term goals to help assess agency progress and understand the impact of budget decisions. Because of the difficulty in developing goals, IRS has experienced delays and lacks a schedule for finalizing those goals. IRS is taking numerous actions to assist taxpayers affected by Hurricanes Katrina and Rita. Most of the impact on IRS, such as more questions from taxpayers, will be felt during the 2006 filing season and beyond.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To address the problems with meeting its long-term electronic filing goal and needing time frames for developing and publicizing long-term goals, the Commissioner of Internal Revenue should direct the appropriate officials to develop better information about the costs to tax practitioners and taxpayers of mandatory electronic filing of tax returns for certain categories of tax practitioners.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS knows more about the benefits of mandated electronic filing, such as reduced processing costs to IRS and faster issuance of refunds to taxpayers, than it knows about the costs borne largely by paid preparers and taxpayers as they convert from paper to electronic filing. For paid preparers, these costs can include the anticipated start-up costs, average number of months to recoup start-up costs, and average total recurring annual costs of electronic filing. On September 30, 2008, in response to our recommendation, IRS released its "Advancing E-file Study" to collect and analyze data that would help IRS increase and improve e-filing. This study addresses our recommendation because, as part of this study, IRS analyzed the relationship of mandated electronic filing on federal electronic filing rates and the cost and burdens of electronic filing for paid preparers and taxpayers. For example, as part of its review of the cost on e-filing, IRS concludes that while cost, such as e-filing fees, can be a factor that inhibits increased electronic filing, it is not the only factor. For example, price options for some preparation products vary widely based on the number and types of returns to be prepared and may easily confuse taxpayers. IRS's study further addresses our recommendation by documenting the increased e-filing rates of Federal returns in states with e-file mandates, compared to national averages. By addressing this recommendation, IRS will know more about the nature and magnitude of these costs could provide fact-based information about the pros and cons of mandatory e-filing.

    Recommendation: To address the problems with meeting its long-term electronic filing goal and needing time frames for developing and publicizing long-term goals, the Commissioner of Internal Revenue should direct the appropriate officials to establish a schedule for developing its long-term goals.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS's FY 2007 Congressional Budget Justification set two long-term goals that link to IRS's strategic goals: improve voluntary compliance and reduce the percentage of taxpayers who think it is acceptable to cheat. On September 30, 2008, IRS released two other documents that contain additional long-term goals: (1) Phases I & II of the Taxpayer Assistance Blueprint (TAB) and (2) IRS's E-Strategy for Growth. While the TAB Phase I & II documents discuss the importance of increasing electronic filing and key demographics of people who electronically file, neither set specific goals for increasing e-filing. However, in the E-Strategy for Growth, IRS sets long-term goals for increasing electronic filing and sets calendar year projections for the number and percentage of electronically filed returns.

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