To achieve our objective, we interviewed IRS National Office officials and IRS officials in the Atlanta, Cincinnati, and Kansas City service centers who were responsible for the various activities we assessed;interviewed staff from the Department of the Treasury’s Financial Management Service (FMS) about the use of lockboxes to process Form 1040 tax payments; analyzed filing season related data from various IRS sources, including its Management Information System for Top Level Executives; visited four walk-in assistance sites (two in Atlanta and one each in Kansas City, MO, and Mission, KS) to interview staff and taxpayers; visited two banks in Atlanta and St. Louis that were being used by IRS as lockboxes to process tax remittances and analyzed cost/benefit data related to IRS’ use of lockboxes; reviewed data on the results of and costs associated with IRS’ decision to allow filers of paper returns to request direct deposits of their refunds; reviewed data on IRS efforts to identify and resolve questionable refund reviewed computer system availability reports and periodically attended weekly operational meetings held by IRS’ Network and Operations Command Center in February, March, and April 1996; analyzed IRS’ toll-free telephone system accessibility data, telephone activity data for forms distribution centers, and accessibility reports for the IRS system (known as TeleFile) that enables some taxpayers to file their returns by telephone; reviewed data compiled by IRS, including the results of a user survey, on the performance of TeleFile; and reviewed relevant IRS internal audit reports. In 1996, IRS implemented revised case selection criteria that resulted in many fewer refund delays than in 1995. The delays caused adverse reaction from taxpayers and tax return preparers during the 1995 filing season. IRS tried to limit the number of delayed refunds to the volume of cases it could review and to focus its resources on the most egregious cases. IRS’ Efforts to Modernize Its Processing Activities Had Mixed Results in 1996

Although IRS was able to meet its processing goals (such as cycle time,processing accuracy, and refund timeliness) in 1996, those goals were based on expectations as to what IRS could achieve with the systems and procedures currently in place. In that regard, there is general agreement that much can be done to improve those systems and procedures. Number of Returns Filed Through Alternative Methods Increased but Electronic Filing Falls Short of Projections

As of October 18, 1996, IRS had received about 118.1 million individual income tax returns, which was about 1.5 percent more than the 116.4 million returns received as of the same period in 1995. Electronic filing has several benefits. It is unclear how taxpayers will react to this change. However, due to concerns about the future of DPS, IRS reassessed its strategy for processing paper tax returns. IRS has taken steps to enhance its efforts. We also question whether IRS’ decision to have taxpayers send both their tax returns and their tax payments to lockboxes and to have banks sort those returns adequately considered both the costs to the government and taxpayer burden.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) overall performance during the 1996 tax filing season, focusing on: (1) changes in 1996 that relate to taxpayer services and the processing of taxpayer refunds; and (2) some of IRS' efforts to modernize its processing activities.

What GAO Found

GAO found that: (1) IRS met or exceeded its timeliness and accuracy goals for processing individual income tax returns and issuing taxpayer refunds, answered more telephone calls from taxpayers seeking assistance than it had planned to answer, and received more returns through alternative filing methods than it had projected; (2) for the 1996 tax filing season, IRS revised its procedures to limit the number of delayed refunds to the volume of cases it could review, and focus on the cases most in need of review, and as a result, IRS delayed many fewer refunds in 1996 than it did in 1995 and avoided the kind of negative press it received in 1995 as taxpayers and tax return preparers reacted to the delays; (3) recognizing that much could be done to improve its systems and procedures, IRS has initiated several modernization efforts, and those efforts achieved mixed results in 1996; (4) IRS is developing a strategy to increase the use of electronic filing and reassessing its strategy for processing paper returns; and (5) IRS' decision to have taxpayers send not only their payments but also their tax returns to a lockbox and to have the banks sort those returns before sending them to IRS has increased program costs, unnecessarily in GAO's opinion, by $4.7 million.