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Previous Assessments of Paid Preparers and IRS's Modernization and 
Compliance Research Efforts' which was released on April 12, 2007. 

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Testimony: 

Before the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EST: 

Thursday, April 12, 2007: 

2007 Tax Filing Season: 

Interim Results and Updates of Previous Assessments of Paid Preparers 
and IRS's Modernization and Compliance Research Efforts: 

Statement of James R. White: 
Director: 
Strategic Issues: 

Statement of David A. Powner: 
Director: 
Information Technology Management Issues: 

GAO-07-720T: 

GAO Highlights: 

Highlights of GAO-07-720T, testimony before the Committee on Finance, 
U.S. Senate 

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. 

What GAO Recommends: 

GAO is not making any new recommendations, but notes relevant past 
recommendations and their implementation status. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-720T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact James R. White at (202) 
512-9110 or whitej@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

We appreciate this opportunity to support your oversight of the 
Internal Revenue Service (IRS) and the broader tax administration 
system. 

The annual tax return filing season is when IRS provides much of its 
service to taxpayers. From January through April, IRS will process well 
over 100 million individual tax returns and issue refunds, handle tens 
of millions of phone queries from taxpayers, and provide forms and 
answers to questions for tens of millions of taxpayers on its Web site. 
Smaller numbers of taxpayers will be assisted at IRS's walk-in sites or 
at sites operated by other organizations and staffed by volunteers. 

While it is always a massive undertaking, the IRS Commissioner stated 
that this year's filing season is high risk for several reasons, 
including challenges in implementing the new telephone excise tax 
refund (TETR), split refund option (refunds can now be directly 
deposited to up to three separate accounts), and several tax law 
extensions that were enacted in December of 2006.[Footnote 1] 

We have reported that IRS has made significant progress improving 
taxpayer service since the passage of the IRS Restructuring and Reform 
Act of 1998 (RRA 98),[Footnote 2] including increased electronic 
filing, better access to IRS's telephone assistors, and more accurate 
answers to taxpayers' questions. The progress has been due, in part, to 
IRS bringing modern information systems on line. However, we have also 
described taxpayer service challenges including the quality of 
assistance at walk-in and volunteer sites, delays in some new 
information systems, and fully implementing our prior recommendations 
on the management of systems acquisition and development. 

In addition to the IRS, tax administration in the U.S. relies heavily 
on the private sector including the paid preparer industry, the tax 
preparation software industry, and third parties who withhold taxes or 
submit information returns. Last filing season, over 60 percent of 
returns were prepared by paid preparers, and another one-fourth use 
commercial tax preparation software. 

IRS's Business Systems Modernization (BSM) program, a multibillion- 
dollar, high-risk, highly complex effort for delivering modern 
information systems, is critical to supporting IRS's taxpayer service 
and enforcement goals and reducing the tax gap.[Footnote 3] 

The ultimate goal of taxpayer service is to help taxpayers understand 
and comply with their tax obligations. However, we have reported that 
IRS lacks quantitative estimates of the impact of taxpayer service on 
voluntary compliance by taxpayers as well as on the impact of 
enforcement on compliance. As a necessary first step to gaining more 
understanding of the impact of service on compliance, we have strongly 
supported IRS's ongoing National Research Program (NRP) to measure 
compliance and estimate the tax gap. 

As agreed, our statement will describe IRS's service to taxpayers so 
far this filing season (including the impact of this year's tax system 
changes) and provide updates of previous assessments of the performance 
of paid tax preparers in our tax administration system, IRS's ongoing 
efforts to modernize its information systems, and what IRS is doing to 
better measure taxpayer compliance with the tax laws including the 
impact of service on compliance. 

To assess IRS's filing season performance for processing, telephones, 
face-to-face assistance and its Internet Web site, we obtained and 
analyzed IRS's performance and production data and compared it to 
annual goals and prior years' performance. Our work also included 
direct observations of key filing season operations, and interviews 
with IRS officials and external stakeholders. 

Our work was done primarily at IRS's National Office operating 
divisions, the Joint Operations Center in Atlanta, Ga. and processing 
centers and call sites in Atlanta, Ga. and Andover, Ma. We reviewed 
relevant external documentation, our reports, and reports of the 
Treasury Inspector General for Tax Administration (TIGTA). Our analyses 
of Internet return preparation and electronic filing options, TETR 
compliance, BSM, and NRP is based upon the results of our recent 
reports.[Footnote 4] We reviewed IRS's efforts to address our prior 
year recommendations related to our annual filing season, paid 
preparer, and BSM work. 

In past work, we assessed IRS's filing season performance data. We 
considered filing season performance measures and data to be objective 
and reliable based on our prior work. Since sources and procedures for 
producing this year's data have not significantly changed from prior 
years, we determined that the data were sufficiently reliable for the 
purposes of this report. Data limitations are discussed where 
appropriate. We performed our work from December 2006 through March 
2007 in accordance with generally accepted government auditing 
standards. 

In summary, we make the following major points: 

² IRS's interim filing season performance is improved in some areas, 
although there have been challenges. As of March 30, 2007, IRS had 
processed 76.8 million individual income tax returns and issued over 68 
million refunds, about the same number as last year. The number of 
returns filed electronically was almost 6 percent greater than this 
time last year. However, taxpayers' use of the Free File program, 
accessible through IRS's Web site and which allows for free on line tax 
preparation and electronic filing, is 5.2 percent below last year at 
this time. IRS's latest release of the Customer Account Data Engine 
(CADE), a modern tax return processing system that issues faster 
refunds, was delayed--it became operational 2 months behind schedule. 
IRS expects to post approximately 17 - 19 million taxpayer returns to 
CADE in 2007. Although this is less than the 33 million planned, it is 
almost two and a half times the approximately 7.4 million taxpayer 
accounts posted last year on CADE. With respect to taxpayer service, 
call volume continued to decline, taxpayers' ability to reach an IRS 
assistor was somewhat less than last year, but the accuracy of answers 
to taxpayers' questions was about the same as last year. Use of IRS's 
Web site continues to increase, important because it is available 
around the clock and is lower cost than most other types of assistance. 
About 69 percent of individual income tax returns filed to date 
included TETR requests. The impact of TETR on taxpayer services has 
been much less than IRS anticipated. For example, IRS has received a 
fraction of the TETR-related telephone calls it expected to date. 

² Because they help the majority of taxpayers prepare their returns, 
paid preparers are a critical quality control checkpoint for the tax 
system. Last year, over 62 percent of all individual income tax returns 
were prepared by paid preparers. However, we reported to this Committee 
last year about errors made by paid preparers.[Footnote 5] In visits to 
19 outlets of several commercial chain preparers, we found that paid 
preparers made mistakes in every one of our visits, with tax 
consequences that were sometimes significant. Some of the most serious 
problems involved preparers not reporting business income and failing 
to itemize deductions at all or failing to claim all available 
deductions. 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 compliant with the tax law. IRS has initiated some enforcement 
actions in response to our findings with audits of some preparers' 
returns scheduled to begin in April 2007. Recent Justice Department 
suits to stop fraudulent return preparation at more than 125 outlets of 
one preparation chain for allegedly taking part in preparation scams 
highlight the obligations of paid preparers. Their due diligence has 
the potential to prevent noncompliance and reduce IRS's cost and 
intrusiveness. 

² IRS continues to make progress in implementing BSM projects and 
meeting cost and schedule commitments, but two key projects--CADE 
(discussed above) and Modernized e-File (a new electronic filing 
system)--experienced significant cost overruns during 2006. Future BSM 
project releases face serious risks, which IRS is working to mitigate. 
For example, delays in deploying the latest release of CADE have 
resulted in contention for key resources and will likely impact the 
design and development of the next two important releases, which are 
scheduled to be deployed later this year. IRS has made significant 
progress in implementing our prior recommendations and improving its 
modernization management controls and capabilities. However, critical 
controls and capabilities related to requirements development and 
management and post-implementation reviews of deployed BSM projects 
have not yet been fully implemented. In addition, more work remains to 
be done by the agency to fully develop a long-term vision and strategy 
for completing the BSM program, including establishing time frames for 
consolidating and retiring legacy systems. 

² Continued compliance research is essential to IRS's ability to 
effectively focus its service and compliance efforts, and we have long 
been a supporter of such research. Well-designed compliance research 
gives IRS and Congress an important measure of taxpayer compliance and 
it allows IRS to better target enforcement resources towards 
noncompliant taxpayers. IRS's fiscal year 2008 budget request includes 
a proposal for a rolling sample of individual returns (small annual 
samples that would replace larger but intermittent efforts) and a 
dedicated cadre of examiners to review the returns. We consider this to 
be a good approach to refreshing research compliance data because doing 
compliance studies once every few years does not provide information in 
the intervening years. A rolling sample should also reduce costs by 
eliminating the need to plan new studies every few years. 

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. As already noted, processing and 
assistance were complicated this year by three tax system changes: 
TETR, the split refund option, and enactment in December 2006 of tax 
law changes. 

Returns Processing Is Comparable to Last Year, Despite Delays with CADE 
and Implementation of Tax System Changes: 

From January 1 through March 30, 2007, IRS processed 76.8 million 
returns, about the same number as last year, and issued 68.3 million 
refunds for $163.4 billion compared to 66.7 million refunds for $154.4 
billion at the same time last year. Over 69.3 percent of all refunds 
were directly deposited into taxpayers' accounts, up 6.2 percent over 
the same time last year. Direct deposits are faster and more convenient 
for taxpayers than mailing paper checks. 

According to IRS data and officials, performance is comparable to last 
year. IRS is meeting most of its performance goals, including deposit 
error rate, which is the percentage of deposits applied in error, such 
as being posted to the wrong tax year. Groups and organizations we 
spoke with, including the National Association of Enrolled Agents, the 
American Institute of Certified Public Accountants, and a large tax 
preparation company, corroborated IRS's view that filing season 
performance is comparable to last year. 

CADE Will Expedite Refunds for Millions of Taxpayers, but Delays in 
Implementation Caused Millions More Not to Benefit: 

IRS uses two systems for storing taxpayer account information--the 
antiquated Master File legacy system and CADE. The latest release of 
CADE became operational in early March, 2 months behind schedule 
because of problems identified during testing. IRS had originally 
planned to post 33 million taxpayer returns to CADE and the remaining 
100 million individual returns on the legacy system. However, as a 
result of the delay, officials expect to post approximately 17 -19 
million taxpayer returns to CADE. 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. Taxpayers eligible 
for a refund this year whose returns are posted to CADE will benefit 
from CADE's faster processing, receiving their refunds 1-5 days faster 
for direct deposit and 4-8 days faster for paper checks than if their 
return had been processed on the legacy system. The remaining 14 - 16 
million returns that were to have been processed on CADE were instead 
processed by the legacy system and thus did not receive the benefit of 
faster refunds. The CADE setback may impact IRS's ability to deliver 
the expanded functionality of future versions of CADE, thus delaying 
the transition to the new processing system (discussed further in the 
BSM section of this testimony). 

Electronic Filing is Higher than Last Year, Despite a Decline in the 
Free File Program: 

The growth rate for electronic filing is up from the same period last 
year. As of March 30, over 56.9 million (74.1 percent) of all 
individual income tax returns were filed electronically. This is up 5.8 
percent over the same time last year, and an increase over the previous 
years' growth of 3.3 percent. 

We previously reported that state mandates for electronic filing of 
state tax returns also encourage electronic filing of both state and 
federal tax returns and last year, we suggested that Congress consider 
mandating electronic filing by paid tax preparers meeting criteria such 
as a threshold for number of returns filed.[Footnote 6] Last year, 
electronic filing of federal returns increased 27 percent for the three 
states (New York, Connecticut, and Utah) with new 2006 mandates. This 
year, state mandates are likely to continue to show a positive effect 
on federal electronic filing because, with the addition of West 
Virginia, 13 states now have state mandates. 

Compared to processing paper returns, electronic filing reduces IRS's 
costs by reducing staff devoted to processing. In 2006, IRS used almost 
1,700 (36 percent) fewer staff years for processing paper tax returns 
than in 1999, shown in figure 1. IRS estimates this saved the agency 
$78 million in salary, benefits, and overtime in 2006. Electronic 
filing also improves service to taxpayers. Returns are more accurate 
because of built-in computer checks and reduced transcription errors 
(paper returns must be transcribed in IRS's computers--a process that 
inevitably introduces errors). Electronic filing also provides faster 
refunds. 

Figure 1: Number of Individual Returns and IRS Staff Years for 
Individual Paper and Electronic Processing, Fiscal Years 1999 - 2008: 

[See PDF for image] 

Source: GAO analysis of IRS data. 

Notes: Staff years and full-time equivalents are units of measurement 
that are often used interchangeably. According to IRS, a full-time 
equivalent is the equivalent of one person working full-time for one 
year with no overtime. A staff year includes overtime. Therefore, the 
cost of one staff year is equal to the cost of one full-time equivalent 
plus overtime. Projections for 2007 do not include Form 1040 EZ-Ts. 

[End of figure] 

Although electronic filing continues to grow, taxpayers' use of the 
Free File program continues to decline.[Footnote 7] The Free File 
program, accessible through IRS's Web site, is an alliance of companies 
that have an agreement with IRS to provide free on-line tax preparation 
and electronic filing on their Web sites for taxpayers below an 
adjusted gross income ceiling of $52,000 in 2007. About 95 million (70 
percent) of all taxpayers are eligible for free file. Under the 
agreement, companies are not allowed to offer refund anticipation loans 
and checks, or other ancillary products, to free file participants. 
Although IRS has increased its marketing efforts, the agency has not 
been successful in increasing free file use. 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. While all 19 companies 
participating in the Free File program allow for TETR requests, only 3 
of the 19 companies offer Form 1040 EZ-T requests.[Footnote 8] 

States' Internet Return Preparation and Electronic Filing Benefits and 
Costs Were Modest: 

We recently reported to this Committee on states' experience with 
return preparation and electronic filing on their Web sites.[Footnote 
9] These systems, called I-file, provide taxpayers with another option 
for preparing and electronically filing their tax returns. To the 
extent that the I-file systems convert taxpayers from paper to 
electronic filing, the costs of processing returns are reduced. 

For the eight states we profiled, I-file benefits and costs were 
relatively modest. While state I-file systems generated benefits, such 
as increased electronic filing, the overall benefits were limited by 
low usage, which ranged from about 1 percent to just over 5 percent of 
eligible taxpayers. Restrictions on taxpayer eligibility and system 
features helped keep costs modest. States varied in whether they used 
contractors to develop and operate the I-file system. For the states we 
profiled, it is unclear whether benefits were greater than costs, in 
part, because of the low number of taxpayers who converted from paper 
to electronic filing. 

IRS's potential to realize net cost savings from an I-file system 
depends on the costs of developing the system and the number of 
taxpayers converted from paper. IRS's costs to provide a new I-file 
service could be higher than states' for several reasons: (1) the 
federal tax system is more complex, (2) unlike some states that already 
had transactional Web sites, IRS would need to develop the capability 
to receive tax returns on its Web site, and (3) developing an I-file 
system could further stretch IRS's capability to manage systems 
development, an area we have designated high risk since 1995. The key 
to IRS achieving a net cost savings depends on the number of 
individuals converted from paper to electronic filing and the savings 
per return estimated to be $2.36 by IRS.[Footnote 10] It is uncertain 
how many of the 58 million taxpayers who filed on paper would convert. 
The over 13 million taxpayers who self-prepare their returns on a 
computer but print them out and mail them to IRS are an attractive 
target for I-file because they already have access to a computer and 
may be more willing to try I-file. However, IRS's Free File program, 
designed to attract similar taxpayers, had low use in 2006, with only 4 
million users (about 3 percent of total taxpayers and 4 percent of 
eligible taxpayers). 

Tax System Changes Have Had Less Impact on Returns Processing Than 
Projected: 

TETR and split refund volume have been less than IRS projected. Almost 
69 percent of individuals who filed individual income tax returns by 
the end of March have requested TETR, although all who paid the excise 
tax were eligible for the refund. IRS projected that 10 to 30 million 
individuals who did not have a tax filing obligation could claim TETR. 
Approximately 410,000 individuals from this group have asked for a TETR 
refund (2.8 percent of the 14.5 million IRS expected by this 
time).[Footnote 11] 

As of March 24, fewer than 61,000 individual taxpayers chose to split 
their refunds into different accounts out of the 44.8 million taxpayers 
who had their refunds directly deposited. This volume compares to the 
3.8 million IRS projected for the filing season. 

IRS delayed processing a small number of returns claiming tax extender 
provisions until February 3 to complete changes to its tax processing 
systems. 

Call Volume Continues to Decline, but Performance Is Mixed: 

The number of calls to IRS's toll-free telephone lines has been less 
than last year and is significantly less than in 2002 for both 
automated and live assistance (see table 1). Similar to last year, IRS 
assistors answered about 40 percent of the total calls, while the rest 
of the calls were answered by an automated menu of recordings. 

Table 1: IRS Telephone Volume in the Filing Seasons, 2002 through 2007: 

Telephone assistance [A]. 

Volume in thousands: Total calls; 
2002: 34,489; 
2003: 27,905; 
2004: 29,085; 
2005: 23,340; 
2006: 21,616; 
2007: 20,732. 

Volume in thousands: Answered by assistors; 
2002: 9,208; 
2003: 9,434; 
2004: 10,143; 
2005: 9,421; 
2006: 8,653; 
2007: 8,434. 

Volume in thousands: Answered by automated menu of recordings; 
2002: 25,281; 
2003: 18,471; 
2004: 18,942; 
2005: 13,919; 
2006: 12,963; 
2007: 12,298. 

Source: IRS. 

[A] Telephone assistance data are based on actual counts from January 1 
to March 16, 2002; March 15, 2003; March 13, 2004; March 12, 2005; 
March 11, 2006; and March 10, 2007. 

[End of table] 

Taxpayers' ability to access IRS's telephone assistors is somewhat less 
than last year, but IRS is meeting its goals. As shown in table 2, the 
percentage of taxpayers who attempted to reach an assistor and actually 
got through and received services--referred to as the level of service-
-was one percentage point less than the same time period last year. 
This level of performance is slightly greater than IRS's fiscal year 
goal of 82 percent which is the same as last year's goal. Average speed 
of answer, which is the length of time taxpayers wait to get their 
calls answered, is just over 4 minutes, almost 40 percent longer than 
last year, but is better than IRS's annual goal of 4.3 minutes. 

Taxpayer disconnects, which is the rate at which taxpayers waiting to 
speak with an assistor abandoned their calls to IRS, increased to 12.3 
percent to about 1.4 million calls compared to the same time period 
last year. While IRS disconnects are a smaller percentage of all calls 
it receives, those disconnects were down from approximately 491,000 at 
this time last year to 148,000 (a 70 percent decline). 

Using a statistical sampling process, IRS estimates that the accuracy 
of telephone assistors' responses to tax law and account questions to 
be comparable to the same time period last year. IRS officials noted 
that there was unprecedented hiring for fiscal year 2007, and while 
every employee working tax law applications completes a requisite 
certification process, new employees will be less productive than 
seasoned employees. IRS has implemented several initiatives, such as 
targeted monitoring of staff and mini-training sessions, to assist the 
new hires. 

Table 2: IRS Telephone Performance in the Filing Season, 2002 through 
2007: 

Telephone performance-access[A]. 

Assistors level of service[B]; 
2002: 69%; 
2003: 82%; 
2004: 84%; 
2005: 83%; 
2006: 84%; 
2007: 83%. 

Average speed of answer (in minutes)[C]; 
2002: 3.8; 
2003: 3.1; 
2004: 3.3; 
2005: 3.9; 
2006: 3.0; 
2007: 4.2. 

Telephone performance-accuracy[D]. 

Accounts customer accuracy rate estimates; 
2002: 88.3% +/-0.9%; 
2003: 87.9% +/-0.7%; 
2004: 89.1% +/-0.8%; 
2005: 91.7% +/-0.7%; 
2006: 92.7% +/-0.7%; 
2007: 92.9% +/-0.9%. 

Tax law customer accuracy rate estimates; 
2002: 83.5% +/-0.7%; 
2003: 81.2% +/-1.0%; 
2004: 75.8% +/-1.3%; 
2005: 87.5% +/-1.0%; 
2006: 90.2% +/-1.0%; 
2007: 88.7% +/-1.5%. 

Source: IRS. 

[A] Telephone performance access data are based on actual counts from 
January 1 to March 16, 2002; March 15, 2003; March 13, 2004; March 12, 
2005; March 11, 2006; and March 10, 2007. 

[B] Assistor level of service is the percentage of taxpayers who wanted 
to talk with an assistor and actually got through and received 
services. 

[C] The number of minutes a taxpayer waits in queue to speak with an 
assistor. 

[D] Based on a representative sample estimate at the 90 percent 
confidence interval for January and February 2006 and 2007. The 
percentage of calls in which telephone assistors provided accurate 
answers for the call type and took the appropriate action. 

[End of table] 

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. Between January 1 and March 
10, 2007, IRS expected 7.5 million TETR-related calls, but received 
about 370,000. This represented 1.8 percent of total calls received by 
IRS. 

IRS hired 650 full-time equivalents in fiscal year 2007, with the 
expectation that those hires would be used to cover anticipated 
attrition in 2008. Their first assignment was answering TETR telephone 
calls. They were also trained to handle other accounts calls and paper 
inventory should the demand for TETR assistance not 
materialize.[Footnote 12] 

IRS anticipated little impact on telephone service from the split 
refund option and tax provision extenders. For split refunds, IRS 
anticipated it would receive about 7,000 calls compared to the 70 
million total calls it receives each year. IRS did not have projections 
for tax provision extenders. 

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. From January 1 through February 28, IRS's Web site was 
visited more often and the number of searches increased. The number of 
downloaded forms and publications has decreased 14 percent over the 
same period compared to last year. According to IRS officials, it is 
too early in the filing season to determine why downloads have 
decreased. In terms of new features, IRS added a state deduction 
calculator this filing season, which IRS wants to use as a new standard 
for developing other on line calculators. 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. 

Table 3: IRS Web Site Use, 2006 and 2007 (data are in thousands): 

Uses: Visits[A]; 
2006: 66,571; 
2007: 72,979; 
Percentage change: 9.6. 

Uses: Downloads[A]; 
2006: 56,405; 
2007: 48,449; 
Percentage change: - 14.1. 

Uses: Searches[A]; 
2006: 35,917; 
2007: 41,435; 
Percentage change: 15.4. 

Uses: Where's My Refund[B]; 
2006: 19,776; 
2007: 24,724; 
Percentage change: 25.0. 

Uses: Number of TETR-related visits[C]; 
2006: N/A; 
2007: 3,283; 
Percentage change: N/A. 

Source: GAO analysis of IRS data. 

Note: N/A means not applicable. 

[A] Web site visits and searches and downloads from January and 
February 2006 and 2007. A visit begins when a visitor views their first 
page on IRS.gov, and ends when the visitor leaves the site. A visit is 
not a count of the number of unique individuals who have accessed the 
site. 

[B] For January 1 through March 20, 2006, and 2007. 

[C] Visits to a Web page specific to TETR, which was not operational in 
2006. For October 1, 2006, through March 10, 2007. 

[End of table] 

In addition to the Free File program, IRS's Web site offers several 
important features, such as Where's My Refund, which allows taxpayers 
to check on the status of their refunds. This year, the feature allows 
taxpayers to check on the status of split refunds, and tells the 
taxpayer if one or more of the deposits were returned from the bank 
because of an incorrect routing or account number. However, for certain 
requests, the feature is not useful. For example, IRS stopped some 
refunds related to TETR requests, but Where's My Refund informed 
taxpayers that their refunds had been issued. Further, if taxpayers 
make a mistake calculating the amount of their refund the feature would 
indicate that IRS corrected the refund amount, but will not show the 
new amount. IRS is considering providing more information about 
taxpayer accounts on its Web site is part of IRS's strategy to improve 
taxpayer services at reduce costs. 

There is further evidence that IRS's Web site is performing well as 
these examples show. 

² According to the American Customer Satisfaction Index,[Footnote 13] 
IRS's Web site is scoring above other government agencies, nonprofits, 
and private sector firms for customer satisfaction (74 for IRS versus 
72 for all government agencies surveyed and 71 for all Web sites 
surveyed). 

² An independent weekly study by Keynote, a company that evaluates Web 
sites, reported that IRS's Web site has repeatedly ranked in the top 6 
out of 40 government agency Web sites evaluated in terms of average 
download time. Last year, IRS consistently ranked second for the same 
time period. Average download time remained about the same for IRS 
compared to last year, indicating that IRS is not performing worse but 
that other government agencies are performing better. 

² On the basis of our own searches, we found IRS's Web site to be 
readily accessible, easy to navigate, and easy to search. 

Limited Data on the Quality of Face-to-Face Assistance Show 
Improvement, but Concerns Remain: 

As of March 17, 2007, approximately 2 million taxpayers used IRS's 401 
walk-in sites, which is comparable to the same period last year. Figure 
2 shows the trend in walk-in site use for the entire filing season 
including a slight projected decline in 2007. At walk-in sites, staff 
provide taxpayers with information about their tax accounts, answer a 
limited scope of tax law questions about, for example, to income and 
filing status, and provide limited tax return preparation 
assistance.[Footnote 14] As of March 10, 6,700 taxpayers have requested 
TETR on Form 1040EZ-T at walk-in sites, which is 5.3 percent of the 
126,000 individuals IRS expected. 

Figure 2: Assistance Provided at IRS Walk-in Sites and Volunteer Sites, 
2001--2008 (contacts in millions): 

[See PDF for image] 

Source: GAO analysis of IRS data. 

Notes: "Other walk-in contacts" includes assistance for account 
notices, tax law inquiries, forms, and compliance work, but not return 
preparation. For the walk-in sites, the time periods covered are 
December 31, 2000, through April 28, 2001; December 30, 2001, through 
April 27, 2002; December 29, 2002, through April 26, 2003; December 28, 
2003, through April 24, 2004; and December 26, 2004, through April 23, 
2005. For volunteer sites, the time period covered for 2001 is January 
1, through April 21, 2001; December 30, 2001, through April 27, 2002; 
December 29, 2002, through April 26, 2003; December 28, 2003, through 
April 24, 2004; December 26, 2004, through April 23, 2005; and January 
1, through April 23, 2006. 

[A] Fiscal years 2007 and 2008 are IRS projections. For walk-in sites, 
projections cover the time periods of December 31, 2006, through April 
28, 2006, and January 1, through April 30, 2008. For volunteer sites, 
projections cover the time periods from January 1 through April 30, 
2007 and 2008. For volunteer sites, projections cover the time periods 
from October 1 through September 30 for 2007 and 2008. According to 
IRS, most taxpayers having their returns prepared at volunteer sites do 
so during the filing season, which is from January 1 through April 30. 

[End of figure] 

IRS officials attribute this year's projected decline in walk-in use to 
taxpayers' increased use of tax preparation software and IRS.gov. This 
decline has allowed IRS to devote 4 percent fewer full-time equivalents 
compared to last year for walk-in assistance (down from 187 to 179 full-
time equivalents). 

Volunteer sites, often run by community-based organizations and staffed 
by volunteers who are trained and certified by IRS, do not offer the 
range of services provided at walk-in sites. Instead, volunteer sites 
focus on preparing tax returns primarily for low-income and elderly 
taxpayers and operate chiefly during the filing season. The number of 
taxpayers getting return preparation assistance at over 11,000 
volunteer sites has increased to approximately 1.3 million, up 8 
percent from last year and continuing a trend since 2001. Although no 
projections have been made for TETR claims, over 33,000 taxpayers have 
claimed this credit at these locations. We have reported that the shift 
of taxpayers from walk-in to volunteer sites is important because it 
has allowed IRS to transfer time-consuming services, such as return 
preparation, from IRS to other less costly alternatives that can be 
more convenient for taxpayers. 

While IRS is collecting better data on the quality of service at walk- 
in sites, concerns about quality of the data and service remain. 
According to IRS, it is measuring the accuracy of tax law and accounts 
assistance. IRS has reported a goal for tax law accuracy, and plans to 
use data collected for 2007 to set an annual goal for accounts 
accuracy.[Footnote 15] While IRS provides return assistance for 125,000 
taxpayers, it lacks information on the accuracy of that assistance. For 
volunteer sites, as of March 2, for a small non-statistical sample, IRS 
reported a 69 percent accuracy rate for return preparation, compared to 
its goal of 55 percent. Independent from IRS, but using similar 
methods, TIGTA showed a 60 percent accuracy rate. 

IRS Is Addressing TETR Compliance Issues During the Filing Season: 

TETR is the only one of the three tax changes that created new 
compliance concerns for IRS (filers could request greater TETR amounts 
than they are entitled to). The split refund option does not create 
compliance concerns for IRS since it relates to the accounts into which 
taxpayers want their refunds deposited rather than to complying with 
tax provisions.[Footnote 16] Since the provisions extending the tax 
laws already existed, IRS anticipates that any compliance concerns for 
2006 returns will be the same as for previous years'. 

IRS developed a plan before the filing season began, to audit suspected 
TETR overclaims before issuing refunds. IRS's plan for TETR was 
consistent with good management practices identified in previous GAO 
reports. IRS's plan included appointing an executive, developing an 
implementation plan for TETR that included standard amounts that 
individuals could request, developing a compliance plan to select TETR 
requests for audit, and monitoring and evaluating compliance by using 
real-time data to adjust TETR compliance efforts. For example, each 
week, IRS reviews the requests for TETR and selects some for audit and 
revises the criteria for audit selection as necessary. 

As of March 24, about 211,000 individuals had requested the actual 
amount of telephone excise tax paid for a total of $98.8 million. IRS 
selected about 5 percent of these requests for audit, involving about 
$29 million.[Footnote 17] IRS has closed four of the individual audits 
with the taxpayer agreeing to accept the standard amount, and has not 
completed the remaining individual audits or any of the business 
audits.[Footnote 18] About 189,000 businesses had requested TETR for a 
total of about $74.7 million. IRS selected about 560 for audit, 
involving about $5.6 million. IRS reassigned about 77 full-time 
equivalent staff from discretionary audits and earned income tax credit 
audits to conduct TETR audits. Additionally, Criminal Investigation has 
spent 13 full-time equivalent staff on TETR activities in 2007. 

Paid Preparers Play a Major Role in Tax Administration but They Make 
Errors: 

Many taxpayers choose to pay others to prepare their tax returns rather 
than prepare their own returns. Sixty-two percent of all the individual 
tax returns filed for the 2006 filing season used a paid preparer. 

In most states, anyone can be a paid preparer regardless of education, 
training, or licensure. However, there are different types of 
preparers. Paid preparers who hold professional certificates include 
CPAs and attorneys. Other preparers vary in their backgrounds. Some 
have extensive training and experience and others do not. 

In 2003 we reported to this Committee that while many taxpayers who 
used paid preparers believed they benefited from doing so, some were 
poorly served.[Footnote 19] Last year we reported to this Committee on 
errors made by commercial chain preparers, including the results of 
undercover visits to 19 locations.[Footnote 20] 

In our visits to 19 outlets of several commercial chain preparers, we 
found that paid preparers made mistakes in every one of our visits, 
with tax consequences that were sometimes significant. The errors 
resulted in unwarranted extra refunds of up to almost $2,000 in five 
instances, while in two cases they cost the taxpayer over $1,500. Some 
of the most serious problems involved preparers: 

² not reporting business income in 10 of 19 cases; 

² 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; 

² failing to take the most advantageous postsecondary education tax 
benefit in 3 out of the 9 applicable cases; and: 

² failing to itemize deductions at all or failing to claim all 
available deductions in 7 out of the 9 applicable cases. 

At the time, IRS officials responded that, had our undercover 
investigators been real taxpayers filing tax returns, many of the 
preparers would have been subject to penalties for such things as 
negligence and willful or reckless disregard of tax rules and some may 
have risen to the level of criminal prosecution for willful preparation 
of a false or fraudulent return. The taxpayers in these cases would 
also have been potentially exposed to IRS enforcement action. 

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. 

IRS and the paid preparer community have taken some actions as a result 
of our work. After we provided the results of our 19 visits to IRS, IRS 
determined that 4 of these cases warranted a Program Action Case. In a 
Program Action Case, IRS selects 30 tax returns from a preparer and 
audits them to look for a pattern of compliance problems. IRS officials 
told us that these audits would begin in April 2007. Other cases were 
referred to the office responsible for monitoring earned income tax 
credit compliance, and we have been told that 10 preparers that we 
visited will receive visits to check for compliance with the due 
diligence requirements of that program. IRS also referred the cases to 
the office that monitors electronic filing compliance. 

We also presented our findings at all six of its nationwide tax forums 
last year, large educational conferences for the paid preparer 
community. In addition, we have been told that some tax preparation 
chains and preparer organizations have incorporated the results of our 
work into their educational materials. Finally, we recommended that IRS 
conduct research to determine the extent to which paid preparers live 
up to their responsibilities to file accurate and complete tax returns 
based on information they obtain from their customers. IRS officials 
have described plans to develop data to use to research paid preparer 
compliance issues, including whether tax preparers who are noncompliant 
themselves are more likely to prepare client returns that are 
noncompliant. To date, this research has not been completed. While this 
may be useful research, we do not believe such research would determine 
the extent to which paid preparers live up to their responsibilities. 

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. 

Progress Made in BSM Implementation, but Challenges and Risks Remain: 

BSM is critical to supporting IRS's taxpayer service and enforcement 
goals and reducing the tax gap. For example, BSM includes projects to 
allow taxpayers to file and retrieve information electronically and to 
provide technology solutions to help reduce the backlog of collections 
cases. 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. 

Over the past year, IRS has made further progress in implementing BSM 
projects and in meeting cost and schedule commitments, but two key 
projects experienced significant cost overruns during 2006--CADE and 
Modernized e-File. During 2006 and the beginning of 2007, IRS deployed 
additional releases of the following modernized systems that have 
delivered benefits to taxpayers and the agency: CADE, Modernized e- 
File, and Filing and Payment Compliance (a tax collection case analysis 
support system). Each of the five associated project segments that were 
delivered during 2006 were completed on time or within the targeted 10 
percent schedule variance threshold, and two of them were also 
completed within the targeted 10 percent variance threshold for cost. 
However, one segment of the Modernized e-File project as well as a 
segment of the CADE project experienced cost increases of 36 percent 
and 15 percent, respectively. According to IRS, the cost overrun for 
Modernized e-File was due in part to upgrading infrastructure to 
support the electronic filing mandate for large corporations and tax- 
exempt organizations, which was not in the original projections or 
scope. 

IRS has also made significant progress in implementing our prior 
recommendations and improving its modernization management controls and 
capabilities, including efforts to institutionalize configuration 
management procedures and develop an updated modernization vision and 
strategy and associated 5-year plan to guide information technology 
investment decisions during fiscal years 2007 through 2011. However, 
critical controls and capabilities related to requirements development 
and management and post implementation reviews of deployed BSM projects 
have not yet been fully implemented. 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. IRS recognizes this and intends to conduct 
further analyses and update its vision and strategy to address the full 
scope of tax administration functions and provide additional details 
and refinements on the agency's plans for legacy system dispositions. 

Future BSM project releases continue to face significant risks and 
issues, which IRS is taking steps to address. IRS has reported that 
significant challenges and risks confront its future planned system 
deliveries. 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. The potential for schedule delays, coupled 
with the reported resource constraints and the expanding complexity of 
the CADE project, increase the risk of scope problems and the deferral 
of planned functionality to later releases. Maintaining alignment 
between the planned releases of CADE and the new Accounts Management 
Services project is also a key area of concern because of the 
functional interdependencies.[Footnote 21] The agency recognizes the 
potential impact of these project risks and issues on its ability to 
deliver planned functionality within cost and schedule estimates and, 
to its credit, has developed mitigation strategies to address them. We 
will, however, continue to monitor the various risks IRS identifies and 
the agency's strategies to address them and will report any concerns. 

IRS has also made further progress in addressing high-priority BSM 
program improvement initiatives during the past year, including efforts 
related to institutionalizing the Modernization Vision and Strategy 
approach and integrating it with IRS's capital planning and investment 
control process, hiring and training 25 entry-level programmers to 
support development of CADE, developing an electronic filing strategy 
through 2010, establishing requirements development/management 
processes and guidance (in response to our prior recommendation), and 
defining governance structures and processes across all projects. IRS's 
high-priority improvement initiatives continue to be an effective means 
of assessing, prioritizing, and incrementally addressing BSM issues and 
challenges. However, more work remains for the agency to fully address 
these issues and challenges. 

In addition, we recently reported that IRS could improve its reporting 
of progress in meeting BSM project scope (i.e., functionality) 
expectations by including a quantitative measure in future expenditure 
plans.[Footnote 22] This would help to provide Congress with more 
complete information on the agency's performance in implementing BSM 
project releases. IRS recognizes the value of having such a measure 
and, in response to our recommendation, is in the process of developing 
it. 

Continued Research Is Essential to Estimating the Impact of IRS's 
Service and Enforcement on Compliance and the Tax Gap: 

Figure 5: Continued compliance research is essential to IRS's ability 
to effectively focus its service and compliance efforts, and we have 
long been a supporter of such research. Well designed compliance 
research gives IRS and Congress an important measure of taxpayer 
compliance and it allows IRS to better target enforcement resources 
towards noncompliant taxpayers. Taxpayers benefit as well, because 
properly targeted audits mean fewer audits of compliant taxpayers and 
more confidence by all taxpayers that others are paying their fair 
share. 

IRS develops its tax gap estimates by measuring the rate of taxpayer 
compliance--the degree to which taxpayers complied with their tax 
obligations fully and on time. That rate is then used, along with other 
data and assumptions, to estimate the dollar amount of taxes not timely 
and accurately paid. For instance, IRS most recently estimated a gross 
tax gap of $345 billion for tax year 2001 and that underreporting of 
income represented over 80 percent of the gap.[Footnote 23] IRS 
developed these estimates using compliance data collected through its 
2001 NRP study, which took several years to plan and execute. 

In that study, IRS reviewed the compliance of a random sample of about 
46,000 individual taxpayers and used those results to estimate 
compliance for the population of all individual taxpayers and identify 
sources of noncompliance. IRS also used the 2001 NRP results to update 
its computer models for selecting likely noncompliant tax returns and 
used that model to select cases beginning with returns filed in 2006. 
IRS's fiscal year 2008 budget request states that this improved 
targeting of audits has increased dollar-per-case yield and reduced "no 
change" audits of compliant taxpayers. IRS now has a second NRP study 
underway, this one looking at 5,000 S corporation tax returns filed in 
2003 and 2004.[Footnote 24] 

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. Using a rolling sample, IRS plans to 
replicate the 2001 NRP study by conducting audits of a smaller sample 
size. At the end of 5 years, IRS would have a comparable set of results 
to the 2001 study and continue to update the study annually by sampling 
the same number of taxpayers, dropping off the oldest year in the 
sample, and adding the new years' results every year. We support this 
approach. 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.[Footnote 25] Compliance research in this way will also 
give Congress, IRS, and other stakeholders more frequent and more 
current information about IRS's progress towards its long term 
compliance goals. 

Mr. Chairman, this concludes my prepared statement. We would be happy 
to respond to questions you or other members of the Committee may have 
at this time. 

Contacts and Acknowledgments: 

For further information regarding this testimony, please contact James 
R. White, Director, Strategic Issues, at 202-512-9910 or whitej@gao.gov 
or David A. Powner, Director, Information Technology Management Issues 
at 202-512-9296 or powenrd@gao.gov. Contacts for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this statement. Individuals making key contributions to this 
testimony include Joanna Stamatiades, Assistant Director; Amy Dingler; 
Timothy D. Hopkins; Robyn Howard; Matthew Kalmuk; David L. Lewis; 
Frederick Lyles; Jennifer McDonald; Signora May; Veronica Mayhand; Paul 
B. Middleton; Sabine R. Paul; Cheryl Peterson; Neil Pinney; Shellee 
Soliday; and Tina L. Younger. 

(450583): 

FOOTNOTES 

[1] The Tax Relief and Health Care Act of 2006 signed into law in 
December 2006 extended some provisions that expired at the end of 
calendar year 2005. These changes include extensions of three tax 
deductions: (1) state and local sales tax, (2) higher education tuition 
and fees, and (3) educator expenses. Pub. L. No. 109-432, Dec. 20, 
2006. 

[2] See, for example, GAO, Tax Administration: IRS Improved Some Filing 
Season Services, but Long-term Goals Would Help Manage Strategic Trade- 
offs, GAO-06-51 (Washington, D.C.: Nov. 14, 2005), Internal Revenue 
Service: Assessment of the Interim Results of the 2006 Filing Season 
and Fiscal Year 2007 Budget Request, GAO-06-615T (Washington, D.C.: 
Apr. 6, 2006), and Tax Administration: Most Filing Season Services 
Continue to Improve, but Opportunities Exist for Additional Savings, 
GAO-07-27 (Washington, D.C.: Nov. 15, 2006). 

[3] The tax gap is an estimate of the difference between what taxpayers 
pay in taxes voluntarily and on time and what they should pay under the 
law. IRS estimated the gross tax gap to be $345 billion for tax year 
2001. After late payments by taxpayers and revenue brought in by IRS's 
enforcement efforts, the resulting net tax gap is estimated to be $290 
billion. 

[4] See, for example, GAO, Taxpayer Service: State Experiences Indicate 
IRS Would Face Challenges Developing an Internet Filing System with Net 
Benefits, GAO-07-570 (Washington, D.C.: Apr. 5, 2007), GAO, Tax 
Administration: Telephone Excise Tax Refund Requests Are Fewer Than 
Projected and Have Had Minimal Impact on IRS Services, GAO-07-695 
(Washington, D.C.: Apr. 11, 2007), GAO, Business Systems Modernization: 
Internal Revenue Service's Fiscal Year 2007 Expenditure Plan, GAO-07-
247 (Washington, D.C.: Feb. 15, 2007) and GAO, Tax Compliance: Multiple 
Approaches Are Needed to Reduce the Tax Gap, GAO-07-488T (Washington, 
D.C.: Feb. 16, 2007). 

[5] GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers 
Made Serious Errors, GAO-06-563T (Washington, D.C.: Apr. 4, 2006). 

[6] GAO-07-27. 

[7] IRS does not have the capability to receive electronic returns 
directly from taxpayers. Taxpayers can electronically file their 
returns by using a paid tax preparer, commercial tax preparation 
software, or the Free File program. Paid preparers and tax preparation 
software companies may charge for the service. 

[8] Individuals who do not normally file tax returns but paid the tax 
can request the refund on Form 1040EZ-T (Request for Refund of Federal 
Telephone Excise Tax). 

[9] GAO-07-570. 

[10] We have previously reported that we cannot independently verify 
this estimate and its basis is unclear because IRS's cost accounting 
system is not yet able to support preparation of such cost estimates. 
See GAO, Tax Administration: IRS Improved Performance in the 2004 
Filing Season, but Better Data on the Quality of Some Services are 
Needed, GAO-05-67 (Washington, D.C.: Nov.15, 2006). 

[11] We are in the process of obtaining additional information to 
evaluate IRS projections on TETR and split refund volumes. 

[12] In addition to answering telephones, IRS's telephone assistors 
also work on paper correspondence, such as amended returns. According 
to IRS officials, staff is working more paper correspondence than 
anticipated. From October 1, 2006 through March 24 2007, receipts of 
paper inventory were up about 6 percent and IRS had closed 10 percent 
more paper inventory than at the same time period last year. 

[13] The American Customer Satisfaction Index tracks trends in customer 
satisfaction and is considered to be an industry leader. 

[14] IRS provides limited return preparation assistance to those who 
meet an IRS-specified income requirement that approximates the amount 
for claiming the Earned Income Tax Credit or less than $39,000. 

[15] As of March 10, IRS reported tax law and accounts assistance 
accuracy rates of 74 and 85 percent respectively. However, because IRS 
could not provide confidence intervals for these estimates, we do not 
know how precise these estimates are and, whether the tax law accuracy 
rate of 74 percent would achieve the goal if a confidence interval were 
considered. 

[16] While there are no compliance concerns, there is a potential for 
errors due to taxpayers entering incorrect account numbers on Form 8888 
(Direct Deposit of Refund to More Than One Account) or IRS incorrectly 
transcribing the account numbers or the dollar amounts to be deposited 
into each account. 

[17] According to IRS officials, as of March 17, 2007, only individuals 
claiming the actual amount of telephone excise tax paid have been 
selected for audit. None claiming the standard amount were selected for 
audit. 

[18] Individuals can claim a standard amount ranging from $30 to $60, 
depending on the number of exemptions they claim or they can use Form 
8913 (Credit for Federal Telephone Excise Tax Paid) to claim the actual 
amount paid. 

[19] GAO, Tax Administration: Most Taxpayers Believe They Benefit from 
Paid Tax Preparers, but Oversight for IRS is a Challenge, GAO-04-70, 
(Washington, D.C.: Oct. 31, 2003). 

[20] GAO-06-563T. 

[21] Accounts Management Services (AMS) is a strategic project intended 
to deliver improved customer support and functionality by leveraging 
existing IRS applications and new technologies to bridge the gap 
between modernization initiatives, such as CADE, and legacy systems. 
AMS is to enhance CADE by providing applications for IRS employees and 
taxpayers to access, validate, and update accounts on demand. The 
development and implementation of the AMS project is also essential to 
enabling CADE to accept more complicated tax returns and to deal with 
taxpayer issues. AMS project releases are to provide functional 
components synchronized with the CADE development schedule as well as 
other components delivered independent of the CADE schedule. 

[22] GAO-07-247. 

[23] IRS has concerns with the certainty of the overall tax gap 
estimate in part because some areas of the estimate rely on old data 
and IRS has no estimates for other areas of the tax gap. For example, 
IRS used data from the 1970s and 1980s to estimate underreporting of 
corporate income taxes and employer-withheld employment taxes. 

[24] IRS has no estimates for other areas of the tax gap, and it is 
inherently difficult to measure some types of noncompliance. The tax 
gap estimate for areas such as corporate income tax and employer- 
withheld employment tax underreporting rely on decades-old data. 

[25] GAO, Internal Revenue Service: Assessment of the Interim Results 
of the 2006 Filing Season and Fiscal Year 2007 Budget Request, GAO-06-
499T (Washington, D.C.: Apr. 27, 2006); Tax Compliance: Better 
Compliance Data and Long-term Goals Would Support a More Strategic IRS 
Approach to Reducing the Tax Gap, GAO-05-753 (Washington, D.C.: July 
18, 2005); and Tax Compliance: Reducing the Tax Gap Can Contribute to 
Fiscal Sustainability but Will Require a Variety of Strategies, GAO-05-
527T Washington, D.C. Apr. 14, 2005).

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