Tax Administration:

IRS' 1997 Tax Filing Season

GGD-98-33: Published: Dec 29, 1997. Publicly Released: Dec 29, 1997.

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Pursuant to a congressional request, GAO assessed the Internal Revenue Service's (IRS) performance during the 1997 tax filing season, focusing on: (1) the ability of taxpayers seeking answers to questions to reach IRS via the telephone; (2) the number of returns filed by means other than the traditional paper method; (3) IRS' efforts to deal with returns that have missing or incorrect social security numbers (SSN); (4) the use of banks, known as lockboxes, to process certain tax payments; and (5) performance of the imaging system IRS uses to process certain tax returns.

GAO noted that: (1) the IRS met or exceeded most of its 1997 filing season related performance goals; (2) of particular note is the substantial improvement in two important areas where GAO has criticized IRS' performance in past filing seasons--telephone accessibility and the use of alternative filing methods; (3) according to IRS data, telephone accessibility increased from 20 percent during the 1996 filing season to 51 percent during the 1997 filing season; (4) the number of tax returns filed by means other than the traditional paper method increased by 25 percent over the last year, with the number of returns filed by telephone (TeleFile) showing the most significant increase--65 percent; (5) although the revised tax package apparently contributed to an increase in the use of TeleFile, it also apparently contributed to a decrease in the performance of the Service Center Recognition/Image Processing System (SCRIPS)--a document imaging and optical character recognition system that IRS implemented in 1994 to process Forms 1040EZ and certain other tax documents; (6) another major change during the 1997 filing season involved the procedures IRS used to process returns that were filed with missing or incorrect SSNs; (7) in 1997, as authorized by the Welfare Reform Act of 1996, IRS began treating missing or incorrect SSNs as math errors rather than as issues that, in the past, had to be resolved through a lengthy notice process; (8) as of September 1, 1997, according to IRS, it had protected about $1.46 billion in revenue through the disallowance of claimed credits or dependent exemptions in 1997, more than doubling the amount disallowed using the procedures IRS followed in 1996; (9) one issue that GAO discussed in a previous report that continues to be of concern is the cost-effectiveness of IRS' use of lockboxes to process 1040 tax payments; (10) additional information GAO obtained this year heightened its concern by calling into question a key assumption IRS and the Department of the Treasury's Financial Management Service (FMS) have used to calculate the interest cost savings associated with this use of lockboxes; and (11) although FMS had planned a study to further assess interest cost savings, those plans have been deferred, and there is no assurance when such a study will be done.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS and FMS have completed their analyses of new data compiled during the 1998 filing season. The data shows that using lockboxes does produce a net savings to the government.

    Recommendation: If the analyses indicate that using lockboxes does not produce a net savings to the government, the Commissioner of Internal Revenue should take steps to have IRS service centers process all Form 1040 payments starting with the 1999 tax filing season.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: A contractor hired by FMS did a study during the 1998 filing season that provided the kind of data called for in the first part of this recommendation. IRS conducted focus groups in 1998 that provided some information on how taxpayers felt about mailing their tax returns and tax payments to separate locations but that information, like the information from prior focus groups, was not definitive. IRS plans no further analyses.

    Recommendation: The Commissioner of Internal Revenue should require the appropriate IRS officials, in doing these analyses, to collect definitive data on: (1) the actual time and interest cost differences between sending tax payments to lockboxes and sending them to IRS during peak and off-peak periods; and (2) whether taxpayers believe, given the processing cost savings to the government, that it would cause them an unreasonable burden to mail tax payments to different locations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS conducted some focus groups in 1998 to get information on how taxpayers felt about mailing their returns and payments in separate envelopes. No further analyses were done and no further analyses are intended. The results of the focus groups were insufficient, by themselves, to support the kind of cost-benefit analysis called for in the recommendation.

    Recommendation: The Commissioner of Internal Revenue should require the appropriate IRS officials to conduct, during the 1998 tax filing season, the analyses necessary to determine whether the potential savings of requiring affected taxpayers to mail their tax returns to IRS and their tax payments to lockboxes in separate envelopes outweigh the estimated additional cost and other burden that this could be expected to cause taxpayers.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS and the Financial Management Service (FMS) have historically asserted that the use of lockboxes is cost-effective because lockboxes can process tax payments faster than IRS service centers and thus get the funds deposited into the Treasury faster. To verify that assertion, FMS contracted for a study, during the 1998 filing season, that compared the time it takes lockboxes to process tax payments with the time it takes the service centers. Data compiled by that study verified IRS' and FMS' assertion.

    Recommendation: The Commissioner of Internal Revenue should require the appropriate IRS officials to conduct, during the 1998 tax filing season, the analyses necessary to determine whether there are net savings to the government attributable to the use of lockboxes to process form 1040 tax payments.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS and FMS undertook analyses that provided some of the data needed to decide whether a change in IRS' procedures is warranted. IRS has decided, based on focus groups, that taxpayers would not support mailing returns and payments to different locations. GAO believes that the results of the focus groups were inconclusive and that focus groups, in general, should not be relied on as the basis for reaching conclusions.

    Recommendation: If the analyses indicate that using lockboxes produces savings and the taxpayers would support the practice of mailing returns and payments to different locations, the Commissioner of Internal Revenue should change the current lockbox procedures as soon as possible and instruct taxpayers to send their returns to IRS and their payments to lockboxes.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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