	IRS’s Filing Season Performance to Date Has Improved in Important Areas, Continuing a Recent Trend

IRS improved its 2006 filing season performance in important areas that  affect large numbers of taxpayers. Taxpayer assistance has improved in the two most commonly used  services—toll-free telephones and the Internet Web site. Electronic filing continues to grow but at a slower rate than previous  years. 1 for further detail). Taxpayers Continue Their Recent Pattern of Using IRS’s Walk-In Sites Less and Using Volunteer Sites More, And Information About the Quality of Service Remains Limited

Fewer taxpayers have used IRS’s 400 walk-in sites so far in the 2006 filing  season compared to the same period in prior years. 2). IRS’s Budget Proposes Decreases in Staffing and Identifies Savings, but Opportunities for Additional Savings Exist

IRS’s fiscal year 2007 budget request is a small decrease compared to 2006  enacted levels after adjusting for expected inflation. For every one of the  major taxpayer services listed in the budget, 2007 planned performance  goals are higher or equal to 2006 performance goals. 3). IRS’s Proposed BSM Budget Reduction Could Impede Future Progress

BSM is a high-risk, highly complex effort that involves developing and  delivering a new set of information systems that are intended to replace  the agency’s aging tax processing and business systems. IRS Sets Long-Term Goals, but Lacks a Data-Based Plan for Achieving the Goals, and Addressing the Tax Gap Requires Solutions Beyond Funding and Staffing for IRS

For the first time, IRS’s budget request sets long-term goals aimed at  reducing the tax gap, although IRS does not have a data-based plan for  achieving the goals. IRS plans to improve voluntary compliance from 83 percent in  2005 to 85 percent by 2009, and reduce the number of taxpayers who think  it is acceptable to cheat on their taxes from 10 percent in 2005 to less than  9 percent in 2010. Unfortunately, quantifying the  impact of IRS’s service and enforcement programs on compliance or  cheating is very challenging. Finally, IRS has  continually improved taxpayer service by increasing, for example, the  accuracy of responses to tax law questions. Therefore, the  Congress will have to rely on the IRS Commissioner for qualitative  explanations, of why, in his judgment, IRS’s mix of taxpayer service and  enforcement and overall approach for reducing the tax gap, including the  2007 budget proposal, will be sufficient to start IRS on a path towards  achieving its long-term goals. Addressing the Tax Gap Requires Solutions Beyond Funding and Staffing for IRS

For years, we have reported that tax law enforcement is a high-risk area,  in part because of the size of the gross estimated tax gap, which IRS most  recently estimated to be $345 billion for tax year 2001. We have reported that significant reductions in the tax gap will likely  require exploring new and innovative solutions.
Why GAO Did This Study

The Internal Revenue Service's (IRS) filing season performance affects tens of millions of taxpayers who expect timely refunds and accurate answers to their tax questions. IRS's budget request is a planning tool showing how it intends to provide taxpayer service and enforce the tax laws in 2007. It is also the first in a series of annual steps that will determine whether IRS meets its new long-term goals of increasing tax compliance and reducing taxpayers' acceptance of cheating on their taxes. Tax law enforcement remains on GAO's list of high-risk federal programs, in part, because of the persistence of a large tax gap. IRS recently estimated the gross tax gap, the difference between what taxpayers owe and what they voluntarily pay, to be $345 billion for 2001. GAO assessed (1) IRS's interim 2006 filing season performance; (2) the budget request; and (3) how the budget helps IRS achieve its long-term goals. GAO compared performance and the requested budget to previous years.

What GAO Found

IRS has improved its filing season performance so far in 2006, continuing a trend. More refunds were directly deposited, which is faster and more convenient. Electronic filing continued to grow, but at a slower rate than in previous years. IRS's two most commonly used services--telephone and Web site assistance--continued to improve. IRS estimates that the accuracy rate for its telephone answers is now 90 percent or more. Taxpayers continued the recent pattern of using IRS's walk-in sites less and community based volunteer sites more. The 2007 budget request of $11 billion, a small decrease after adjusting for inflation, sets performance goals for service and enforcement that are all equal to or higher than the 2006 goals. The budget reduces funding by 15 percent for Business Systems Modernization, the ongoing effort to replace IRS's aging information systems. The reduction could impede progress delivering improvements to taxpayers. The budget request identifies over $121 million in savings; however, opportunities exist for further savings. For example, IRS officials told us that IRS's 25 call centers have underutilized space. Those centers could be consolidated without affecting service to taxpayers. Achieving IRS's long-term compliance goals will be challenging because the tax gap has persisted for many years at about its current level. In addition, because the effect of taxpayer service and enforcement on compliance has never been quantified, IRS does not have a data-based plan demonstrating how it will achieve its goals. Nor does IRS have a plan for measuring compliance by 2009, the date for achieving the goals. Reducing the tax gap will likely require new and innovative solutions such as simplifying the tax code, increasing income subject to withholding, and increasing information reporting about income.