The number of the most complex individual income tax returns filed on  paper—standard Form 1040s—essentially stayed the same. The number of paper individual income tax returns received by IRS during  the peak filing period stayed relatively the same from 1997 through 2000,  and peak processing needs drive the resources needed to process  individual paper returns. Volume of Returns Received During Peak Filing Period Drives Resource Needs; Peak Volume Stayed About the Same From 1997 Through 2000

Another filing trend that limited the impact of electronic filing on  processing costs was the increase in the number of paper returns filed by  individuals during the peak filing period—the 2 weeks of the year when  the most individual income tax returns are filed. Demands Placed on Paper Processing Staff Were Expanded

Another factor that limited the impact of electronic filing on the resources  devoted to paper processing was the increase in demands placed on paper  processing staff from 1997 through 2000. These increased demands  included the following:
Numerous processing changes increased the workload for units  responsible for (a) reviewing returns for completeness and coding them  for data entry, (b) transcribing data, and (c) correcting errors. Because most electronic filers submitted a paper signature document, the  work done by paper processing staff was not totally eliminated when  taxpayers filed electronically and the volume of that work increased as  electronic filing increased. Front-line employees spent increasing amounts of time on activities,  including training, not specifically related to processing returns. 80 percent of individual returns filed electronically. To address this objective, we interviewed several Internal  Revenue Service (IRS) officials responsible for submission processing and  electronic tax administration. Our second objective was to determine the prospects for future reductions  in submission processing costs.
What GAO Found

From fiscal years 1997 through 2000, the number of individual and business tax returns filed electronically increased from 23 million to 41 million. During the same period, the Internal Revenue Service's (IRS) expenditures for submission processing grew from $795 million to $924 million, an increase of 16 percent. Because it costs less to process an electronic return than a paper return, a growth in processing costs seemed improbable. Interviews with IRS officials and an analysis of relevant documentation identified several factors that limited the impact of electronic filing. Specifically, (1) the overall number of individual and business tax returns filed increased, and the resources needed to process that increase partially offset the resources saved by processing more electronic returns; (2) the number of the most costly to process individual income tax returns filed on paper essentially stayed the same; and (3) the number of individual income tax returns filed on paper and received during the peak filing period stayed relatively the same, and peak processing needs drive the resources needed to process individual paper returns. Although electronic filing increased, so did the demands placed on paper processing staff. In particular, (1) processing changes increased the workload for units responsible for reviewing returns for completeness and coding them for entry data, and correcting errors; (2) because most electronic filers still sent a paper signature document to IRS, the work done by paper processing staff was not entirely eliminated when taxpayers filed electronically; and (3) front-line paper processing staff spent increasing amounts of time on activities, including training, not specifically related to processing returns. Future reductions in processing costs as a result of electronic filing are possible.