Compared to paper, electronic  filing allows taxpayers to receive refunds faster, is less prone to  transcription and other errors, and provides IRS with significant cost  savings. RALs are short-term, high interest rate bank loans. IRS uses its many tools to identify and correct noncompliance, whether  intentional or unintentional. IRS gets most of the information returns during the filing season. Access to Telephone Assistors Remained Low, and IRS Has a Limited Understanding of Why Taxpayers Call and Has Not Clearly Integrated TAB into Its Planning Documents

As of October 2, 2009, IRS processed 139 million individual income tax  returns. It helps  taxpayers to receive their refunds faster and aids IRS in achieving the  electronic filing goal of having 80 percent of all federal tax and  information returns filed electronically by 2012. This increase is important, because direct deposit is  faster, more convenient for taxpayers, and less expensive for IRS than  mailing paper checks. This accounts for about 29 percent of all returns processed. Access to Telephone Assistors Remained Low for the Second Year in a Row and IRS Decreased Its 2010 Access Goal

As shown in table 3, taxpayers’ access to IRS’s telephone assistors was  better than last year, but was below IRS’s original goal for 2009 and  remains well below 2005 through 2007 performance. Despite the heavy call volume, the accuracy of the telephone assistors’  responses to tax law and account questions was higher by a statistically  significant amount compared to the same period last year and exceeded  IRS’s fiscal year 2009 goals (see table 5). To help obtain better information on why taxpayers call, IRS recently  implemented a major data collection effort called Contact Analytics at all  its 26 call sites. In contrast, IRS’s mystery  shopping reviews resulted in a 68 percent accuracy rate. Figure 1 also shows that  refund processing time varies by day of the week and is shorter for  refunds processed on CADE than on IRS’s legacy individual master file,  three entities--IRS, Treasury’s Financial Management Service (FMS)  and Automated Clearing House (ACH)—share responsibility for issuing  refunds (see table 8 below). IRS runs pre-refund tax law compliance  checks, FMS checks for non tax debt owed to the federal government,  and ACH distributes the funds. IRS Has Not Studied the Use of Debit Cards for Unbanked Taxpayers

While IRS offers paper check and direct deposit options for delivering  refunds to taxpayers, it has not studied the feasibility of distributing  refunds electronically through debit cards. Millions of  taxpayers claim the Hope and Lifetime Learning tax credits to offset  qualified education expenses. However, the information currently reported by  educational institutions on tuition statements sent to IRS and taxpayers  (on Form 1098-T) may be confusing for taxpayers who use the form to  prepare their tax returns and not very useful to IRS. According to IRS officials, because  the amount billed may not be the amount taxpayers are eligible to claim as  a credit, IRS does not compare tuition statement information to the  information reported on a tax return. Matters for Congressional Consideration

Congress should consider providing IRS with MEA to use prior years’ tax  return information to automatically verify taxpayers’ compliance with the  limit on the number of years the Hope credit can be claimed. To reduce taxpayer confusion and enhance compliance with the eligibility  requirements for higher education benefits, IRS should   Determine the feasibility of using current information reported on  Form 1098-T, such as school location and taxpayer identification  number or SSN, in IRS’s compliance programs; and    Revise Form 1098-T to improve the usefulness of information on  qualifying education expenses.
Why GAO Did This Study

The Internal Revenue Service's (IRS) filing season is an enormous undertaking that includes processing tax returns, issuing refunds, and responding to taxpayer questions. IRS's efforts to ensure compliance begin during the filing season. GAO was asked to assess IRS's 2009 filing season performance, identify ways to reduce taxpayers' use of short-term, high-interest refund anticipation loans (RAL) offered by paid preparers or banks, and identify ways to enhance compliance during processing. GAO analyzed IRS performance data, reviewed IRS operations, interviewed IRS officials, and reviewed its compliance programs and relevant statutes.

What GAO Found

IRS processed 139 million returns and issued $298 billion in refunds as of October 2, 2009. Electronic filing, which provides IRS with significant cost savings and taxpayers with faster refunds, increased to 68 percent of all returns filed. While taxpayers' access to telephone assistors was better than last year, it remained lower than in 2007 in part because of calls about tax law changes. Compared to 2005 through 2007, IRS reduced its goal for assistor answered calls in 2009 and set its 2010 goal at 71 percent. Despite heavy call volume, the accuracy of IRS responses to taxpayers' questions remained above 90 percent. IRS started a major data collection effort on why taxpayers call, but lacks a plan to analyze the data and improve telephone service. According to IRS, issuing refunds faster reduces taxpayers' use of RALs, high-interest loans made by paid tax preparers or banks in anticipation of a refund. Issuing refunds is a joint effort by IRS, Treasury's Financial Management Service, which checks for non-tax debt owed to the federal government, and the Automated Clearing House, which distributes funds. However, IRS has not coordinated extensively with them to expedite refunds. Further, IRS has not studied the use of debit cards for unbanked taxpayers, which could also reduce taxpayers' use of RALs by providing faster and more secure refunds. IRS automatically identifies and corrects select types of errors while processing tax returns. It could also correct tax returns that claim the Hope credit, a tax credit to help offset qualified education expenses, for longer than the number of years allowed. However, IRS lacks the authority to use prior years' tax return information for this purpose. Also, information reported by education institutions to taxpayers and IRS about qualifying educational expenses on the Form 1098-T is confusing for taxpayers and not useful for IRS. Many institutions report the total amount billed to students, but not what is actually paid after taking into account scholarships and grants. This results in some taxpayers under-claiming benefits, while others over-claim. Finally, because Form 1098-T can show the amount billed, which may not be the amount paid, IRS is unable to use the information to automatically verify taxpayers' claims for the credit through its computerized matching program.