	IRS’s Filing Season Performance Is Improved in Some Areas with Challenges in Others, and the Effect of Tax System Changes Has Been Minimal

IRS’s key filing season efforts are processing electronic and paper  individual income tax returns and issuing refunds, as well as providing  assistance or services to taxpayers. According to IRS data and officials, performance is comparable to last  year. The latest release of  CADE became operational in early March, 2 months behind schedule  because of problems identified during testing. Although this is significantly less than planned, it is almost two and  a half times the approximate 7.4 million taxpayer accounts posted last year  on CADE. Electronic filing also improves  service to taxpayers. As of March 17,  2007, IRS processed about 2.6 million free file returns, which is a decrease  of 5.2 percent from the same period last year. Taxpayers’ ability to access IRS’s telephone assistors is somewhat less  than last year, but IRS is meeting its goals. IRS officials reported that tax system changes have had minimal impact on  telephone operations so far this filing season. TETR-related calls are a  small fraction of what IRS projected. Use of Some Web Site Applications Continues to Increase, and Performance Remains High

Use of IRS’s Web site has increased so far this filing season compared to  prior years except for downloads of forms and publications and tax law  questions. Web site assistance is important because it is available to  taxpayers 24 hours a day and it is less costly to provide than telephone and  walk-in assistance. IRS’s plan for TETR was  consistent with good management practices identified in previous GAO  reports. However, there are different types of preparers. Last year we reported to this Committee on errors made  by commercial chain preparers, including the results of undercover visits  to 19 locations. Some of the most serious  problems involved preparers    not reporting business income in 10 of 19 cases;    not asking about where a child lived or ignoring our answer to the  question and, therefore, claiming an ineligible child for the earned  income tax credit in 5 out of the 10 applicable cases; failing to take the most advantageous postsecondary education tax  benefit in 3 out of the 9 applicable cases; and failing to itemize deductions at all or failing to claim all available  deductions in 7 out of the 9 applicable cases. The limited data did not permit observations about the quality of the work  of paid tax preparers in general. Undoubtedly, many paid preparers do  their best to provide their clients with tax returns that are both fully  compliant with the tax law and cause them to neither overpay nor  underpay their federal income taxes. To date, this  research has not been completed. Recent suits filed by the Justice Department highlight the obligations of  paid preparers. The Justice Department filed suits to stop fraudulent  return preparation at more than 125 outlets in four states of one  preparation chain for allegedly taking part in preparation scams that led to  fraudulent returns. Because they help the majority of taxpayers prepare their returns, paid  preparers are a critical quality control checkpoint for the tax system. Due  diligence by paid preparers has potential to prevent non-compliance and  reduce IRS’s cost and intrusiveness. Despite progress made in implementing BSM projects and improving  modernization management controls and capabilities, significant  challenges and serious risks remain, and further program improvements  are needed, which IRS is working to address. In addition, more work remains to be  done by the agency to fully address our prior recommendation of  developing a long-term vision and strategy for completing the BSM  program, including establishing time frames for consolidating and retiring  legacy systems. For  example, delays in deploying the latest release of CADE to support the  current filing season have resulted in continued contention for key  resources and will likely impact the design and development of the next  two important releases, which are planned to be deployed later this year. IRS’s fiscal year 2008 budget request includes a proposal for a rolling NRP  sample of individual taxpayers and a dedicated cadre of examiners to  conduct these research audits. In  previous GAO products, we have observed that doing compliance studies  once every few years does not give IRS or others information about what  is happening in the intervening years, and that a rolling sample should  reduce costs by eliminating the need to plan entirely new studies every  few years or more and train examiners to carry them out.
Why GAO Did This Study

The Internal Revenue Service's (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers. This year's filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR) which can be requested by all individuals and entities that paid the excise tax. GAO was asked to describe IRS's service to taxpayers so far this filing season (including the impact of this year's tax systems changes). GAO was also asked to provide updates of previous assessments of the performance of paid tax preparers, IRS's efforts to modernize its information systems, and what IRS is doing to better measure taxpayer compliance. GAO compared IRS's filing season performance to prior years' and goals and based analyses of paid preparers, information systems, and compliance research efforts on recent reports.

What GAO Found

IRS's interim filing season performance is improved in some areas. The number of individual income tax returns processed to date is comparable to last year, and the number filed electronically is almost 6 percent greater. Taxpayers' ability to reach an IRS telephone assistor was somewhat less than last year, but the accuracy of answers to taxpayers' questions was about the same. Use of IRS's Web site increased, important because it is available 24 hours a day and is less costly than some other types of assistance. However, there have been challenges. Taxpayers' use of the Free File program, which provides free tax preparation and electronic filing through IRS's Web site--is 5.2 percent below last year at this time. Also, the Customer Account Data Engine (CADE), a modern tax return processing system, became operational 2 months behind schedule. IRS still expects to post 17 -19 million taxpayer accounts to CADE, which is about two and a half times more than last year. Tax systems changes have not had a significant effect on filing season performance. For example, IRS has received a fraction of the TETR-related telephone calls it expected to date. Because paid preparers prepared over 62 percent of all individual income tax returns last year, they are a critical quality control for tax administration by helping to prevent noncompliance. Last year, GAO reported to this Committee about errors made by paid preparers. Some of the most serious errors involved not reporting business income and failing to itemize deductions. GAO's limited work last year did not permit observations about the quality of the work of paid tax preparers in general and undoubtedly, many preparers do their best to prepare tax returns that are compliant with tax laws. In response to GAO's report, IRS has scheduled compliance reviews of some preparers. In addition, recent Justice Department suits to stop fraudulent return preparation at more than 125 outlets of one preparation chain for allegedly taking part in tax preparation scams highlight the importance and obligations of paid preparers. Despite progress made in implementing Business Systems Modernization projects, including CADE, and improving modernization management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. Also, IRS has more to do to fully address GAO's prior recommendations such as developing a long-term strategy that would include timeframes for retiring legacy computer systems. GAO has long supported IRS's research to better understand taxpayers' compliance. IRS's fiscal year 2008 budget request includes a proposal for annual research instead of larger but intermittent efforts. GAO considers this to be a good approach because it will allow compliance data to be continually refreshed and should reduce costs by eliminating the need to plan new studies every few years.