oversight

Internal Revenue Service: Opportunities to Improve the Taxpayer Experience and Voluntary Compliance

Published by the Government Accountability Office on 2012-04-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Testimony
                             Before the Committee on Finance,
                             U.S. Senate


                             INTERNAL REVENUE
For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, April 26, 2012

                             SERVICE
                             Opportunities to Improve
                             the Taxpayer Experience
                             and Voluntary Compliance
                             Statement of James R. White, Director
                             Strategic Issues




GAO-12-652T
                                              April 26, 2012

                                              INTERNAL REVENUE SERVICE
                                              Opportunities to Improve the Taxpayer Experience
                                              and Voluntary Compliance
Highlights of GAO-12-652T, a testimony
before the Committee on Finance, U.S.
Senate




Why GAO Did This Study                        What GAO Found
The U.S. tax system depends on                The Internal Revenue Service (IRS) has made improvements in processing tax
taxpayers calculating their tax liability,    returns, and electronic filing (e-filing), which provides benefits to taxpayers
filing their tax return, and paying what      including faster refunds, continues to increase. However, as the following table
they owe on time—what is often                shows, IRS’s performance in providing service over the phone and responding to
referred to as voluntary compliance.          paper correspondence has declined in recent years. For 2012, as with previous
Voluntary compliance depends on a             years, IRS officials attribute the lower performance to other funding priorities.
number of factors, including the quality
of IRS’s assistance to taxpayers,             IRS’s Performance for Telephone Service and Paper Correspondence, Fiscal Years 2007
knowledge that its enforcement                through 2013
programs are effective, and a belief                                                                                                               2012      2013
that the tax system is fair and other                                                   2007         2008        2009       2010         2011   planned   planned
people are paying their share of taxes.        Percentage of callers
                                               seeking and receiving live
Voluntary compliance is also
                                               assistance                                82.1         52.8          70         74        70.1      61.0      63.0
influenced by other parties, including          Average wait time for
paid tax return preparers, tax software        callers (in minutes)                        4.4        10.4         8.8       10.8        13.0      18.8      18.8
companies, and information return              Percentage of paper
filers (employers, financial institutions,     correspondence not
and others who report income or                resolved within 45 days                      17           23         25         27          35       n/a       n/a
expense information about taxpayers           Legend: n/a = not applicable.
to IRS). For this testimony, GAO was          Sources: IRS Oversight Board, IRS’s Congressional Budget Justification, and GAO Reports.
asked to (1) evaluate the current state
of IRS’s performance and its effect on        Following are among the opportunities to improve the taxpayer experience and
the taxpayer experience, and (2)              increase voluntary compliance that GAO identifies in this testimony:
identify opportunities to improve the         •     IRS can provide more self-service tools to give taxpayers better access
taxpayer experience and voluntary                   to information. IRS can create an automated telephone line for amended
compliance. This testimony is based
                                                    returns (a source of high call volume) and complete an online services
on prior GAO reports and
recommendations. Additionally, GAO                  strategy that provides justification for adding new self-service tools online.
analyzed IRS data in delivering               •     Better leveraging of third parties could provide taxpayers with other
selected taxpayer services in recent                avenues to receive service. Paid preparers and tax software providers
years.                                              combine to prepare about 90 percent of tax returns. IRS is making progress
                                                    implementing new regulation of paid preparers. As it develops better data,
What GAO Recommends                                 IRS should be able to test strategies for improving the quality of tax return
                                                    preparation by paid preparers. Similarly, IRS may also be able to leverage
GAO has made numerous prior                         tax software companies.
recommendations that could help
                                              •     Expanded information reporting could reduce taxpayer burden and
improve the taxpayer experience.
Congress and IRS have acted on
                                                    improve accuracy. Expanded information reporting, such as the recent
some recommendations, while others                  requirements for banks and others to report businesses’ credit card receipts
are reflected in the strategies                     to IRS, can reduce taxpayers’ record keeping and give IRS another tool.
presented in this testimony.                  •     Implementing modernized systems should provide faster refunds and
                                                    account updates. Modernized systems should allow IRS to conduct more
                                                    accurate and faster compliance checks, which benefits taxpayers by
                                                    detecting errors before interest and penalties accrue.
                                              •     Expanding pre-refund compliance checks could result in more efficient
                                                    error correction. Expanding such checks could reduce the burden of audits
                                                    on taxpayers and their costs to IRS.
View GAO-12-652T. For more information,       •     Reducing tax complexity could ease taxpayer burden and make it
contact James R. White at (202) 512-9110 or
whitej@gao.gov.                                     easier to comply. Simplifying the tax code could reduce unintentional errors
                                                    and make intentional tax evasion easier to detect.
                                                                                                              United States Government Accountability Office
Chairman Baucus, Ranking Member Hatch, and Members of the
Committee:

Thank you for the invitation to be here today to discuss how to improve
the taxpayer experience.

The U.S. tax system depends on taxpayers calculating their tax liability,
filing their tax return, and paying what they owe on time. The taxpayer
experience is at its best when taxpayers are able to fulfill these
responsibilities independently without intervention from the Internal
Revenue Service (IRS). This is often referred to as voluntary compliance.
Some of the obvious influences on taxpayers’ willingness and ability to
voluntarily comply include the quality of IRS’s service to taxpayers,
knowledge that IRS’s compliance checks and collection programs are
effective, and the belief that the tax system is fair and that others are
paying their share of taxes. Perhaps less obvious is the role of third
parties, including paid tax return preparers, tax software companies, and
information return filers (employers, financial institutions, and others who
report income or expense information about taxpayers to IRS) in
influencing voluntary compliance.

The taxpayer experience also depends on how IRS deals with taxpayers
who fail to voluntarily comply by helping taxpayers correct unintentional
errors, and identifying and pursuing taxpayers who intentionally try to
evade taxes.

Maximizing voluntary compliance is especially important today given the
nation’s large structural budget deficits and the size of the tax gap. Earlier
this year, IRS estimated the gross tax gap—the difference between taxes
owed and taxes paid on time—at $450 billion for tax year 2006. IRS
estimated that it would eventually collect $65 billion of this through
enforcement actions and late payments, leaving a net tax gap of $385
billion.

My statement today focuses on two areas: (1) evaluating the current state
of IRS’s performance and its effect on the taxpayer experience, and (2)
identifying opportunities to improve the taxpayer experience and voluntary
compliance. To address these objectives, we reviewed and summarized
prior GAO reports and recommendations. Additionally, we obtained and
analyzed IRS data in delivering selected taxpayer services in recent
years. We discussed newly reported information in this statement with
IRS officials. Additional information on the scope and methodology of
underlying work is available in published products, referenced throughout


Page 1                                                             GAO-12-652T
                              this statement. We conducted our work in April 2012 in accordance with
                              generally accepted government auditing standards. Those standards
                              require that we plan and perform the audit to obtain sufficient, appropriate
                              evidence to provide a reasonable basis for our findings and conclusions
                              based on our audit objectives. We believe that the evidence obtained
                              provides a reasonable basis for our findings and conclusions based on
                              our audit objectives.


                              Taxpayers’ experience depends heavily on IRS’s performance during the
Taxpayers Have                tax filing season, roughly mid-January through mid-April. 1 During this
Benefitted from               period, millions of taxpayers who are trying to fulfill their tax obligations
Improved Processing,          contact IRS over the phone, face-to-face, and via the Internet to obtain
                              answers to tax law questions and information about their tax accounts.
but IRS’s Service to          This period is also when IRS processes the bulk of the approximate 140
Taxpayers Has                 million returns it will receive, runs initial compliance screens, and issues
                              over 100 million refunds. In recent years, IRS has improved its returns
Declined                      processing but has seen its taxpayer service performance deteriorate.


Increased Electronic Filing   For years we have reported that electronic filing (e-filing) has many
Contributes to Greater        benefits for taxpayers, such as higher accuracy rates and faster refunds
Return Accuracy and           compared to filing on paper. So far in 2012, the percentage of e-filed
                              returns has increased by 1.9 percentage points to 88.8 percent since
Faster Processing             about the same time last year (a 2.2 percent increase), as table 1 shows.
                              Since the same time in 2007, the percentage of e-filed returns has
                              increased from 72.3 percent to 88.8 percent. This year, IRS may meet its
                              long-held goal of having 80 percent of individual tax returns e-filed.
                              However, the overall e-file percentage is likely to decline as the tax filing
                              season ends since IRS typically receives more returns filed on paper later
                              in the filing season. In addition, IRS is in the midst of a multi-phase
                              modernization project, known to as the Customer Account Data Engine
                              (CADE) 2, which will fundamentally change how it processes returns.
                              With CADE 2, IRS also expects to be able to issue refunds in 4 business
                              days for direct deposit and 6 business days for paper checks after IRS
                              processes the return and posts the return data to the taxpayer’s account.




                              1
                               The filing season year is the year in which the taxpayer files the tax return, usually the
                              year after a taxpayer has earned income on which tax is due (which is referred to as the
                              tax year).




                              Page 2                                                                          GAO-12-652T
Table 1: Processing Data for January 1 through Mid-April, 2007 through 2012

                                                                                                                                         Percentage
                                                                                                                                        change from
                                                      2007             2008             2009          2010       2011       2012        2011 to 2012
Number of individual tax returns processed        105,159         114,737           112,612         107,158    107,401    105,668                  -1.6
(in thousands)
   Electronic (in thousands)                       76,034           84,935            89,268         88,330     93,306     93,846                   0.6
   Paper (in thousands)                            29,125           29,801            23,344         18,828     14,094     11,822                 -16.1
Percentage electronically fileda                       72.3             74.0             79.3          82.4       86.9       88.8                   2.2
Number of refunds issued (in thousands)            88,168           89,898            93,438         88,676     88,157     86,078                  -2.4
Amount of refunds (dollars in millions)          $203,022        $214,264         $250,635         $257,324   $252,596   $237,750                  -5.9
Average refund amount                              $2,303           $2,383            $2,682         $2,902     $2,865     $2,762                  -3.6

                                             Legend: n/a = not applicable.
                                             Source: GAO analysis of IRS return processing data.

                                             Notes: Data are from January 1 of each year through April 20, 2007; April 18, 2008; April 17, 2009;
                                             April 16, 2010; April 15, 2011; and April 13, 2012. Some figures and totals may vary slightly due to
                                             rounding.
                                             a
                                              The percentage of returns filed electronically early in the filing season is likely to decline before the
                                             filing season is over. Taxpayers filed about 78 percent of all individual returns electronically in 2011.


                                             Early in the 2012 filing season, IRS experienced two processing problems
                                             that delayed refunds to millions of taxpayers, and reported the problems
                                             had been resolved by mid-February. We summarized these problems in
                                             an interim report on the 2012 filing season. 2


Taxpayer Service Has                         Providing good taxpayer service is important because, without it,
Declined                                     taxpayers may not be able to obtain necessary and accurate information
                                             they need to comply with tax laws. In addition, more and more, taxpayers
                                             are relying on IRS’s website to obtain information and execute
                                             transactions, making it important that IRS have a modern website.
                                             However, as we have reported, IRS has experienced declines in
                                             performance in selected taxpayer service areas, most notably with
                                             respect to providing live telephone assistance and timely responses to




                                             2
                                              GAO, Internal Revenue Service: Interim Results of 2012 Tax Filing Season and Summary
                                             of the Fiscal Year 2013 Budget Request, GAO-12-566 (Washington, D.C.: Mar. 20 2012).




                                             Page 3                                                                                       GAO-12-652T
                                            taxpayers’ correspondence. 3 When taxpayers do not get timely responses
                                            from IRS to paper correspondence or have access to information online,
                                            they call IRS, correspond again, or seek face-to-face assistance—all of
                                            which are costly to IRS and burdensome to the taxpayer. Table 2 shows
                                            the declines in telephone service and paper correspondence and the
                                            goals for 2012 and 2013. Additional performance data is shown in
                                            appendix I.

Table 2: IRS’s Performance for Telephone Service and Overage Paper Correspondence, Fiscal Years 2007 through 2013

Performance measure (in percent)                       2007            2008            2009            2010            2011 2012 planned 2013 planned
Assistor calls
Percentage of callers seeking live assistance           82.1            52.8               70              74           70.1                    61.0                   63.0
who receive it
 Average wait time (in minutes)                           4.4           10.4              8.8           10.8            13.0                    18.8                   18.8
Overage paper correspondence (in percent)a                 17              23              25              27              35                    n/a                     n/a

                                            Legend: n/a = not applicable.
                                            Sources: 2009 and 2010 IRS Oversight Board Annual Reports to Congress, the fiscal year 2013 Congressional Justification for IRS and
                                            GAO reports.
                                            a
                                             IRS generally considers paper correspondence that is not resolved within 45 days to be overage.
                                            IRS does not have a performance measure for taxpayer correspondence that includes providing
                                            timely service to taxpayers, which we recommended in 2010. See, GAO, 2010 Tax Filing: IRS’s
                                            Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others, GAO-11-111
                                            (Washington, D.C.: Dec. 16, 2010).


                                            So far in the 2012 filing season, as the following examples illustrate,
                                            declines in taxpayer service have continued (further information on
                                            telephone service trends is in appendix II).

                                            •     The level of telephone service (taxpayers seeking and receiving live
                                                  telephone assistance) is about 68 percent so far during the 2012 tax
                                                  filing season, down about 7 percentage points from 2011. This
                                                  represents a significant decline from fiscal year 2007 level, when the
                                                  level of service was 82 percent.

                                            •     The average wait time to talk with an assistor increased to about 16
                                                  minutes (from 9.5 minutes in 2011). In fiscal year 2007, the average
                                                  wait time was just under 5 minutes.



                                            3
                                             See GAO-12-566; and 2011 Tax Filing: Processing Gains, but Taxpayer Assistance
                                            Could Be Enhanced by More Self-Service Tools, GAO-12-176 (Washington, D.C.: Dec.
                                            15, 2011).




                                            Page 4                                                                                                          GAO-12-652T
                             IRS has also lowered its telephone service and average wait time goals
                             (meaning it expects wait times to be longer) for fiscal year 2012. IRS’s
                             goal for the

                             •   level of telephone service is 61 percent, down from 71 percent in
                                 fiscal year 2011 and 82 percent in fiscal year 2007; and

                             •   average wait time to speak to an assistor is 18.8 minutes, an increase
                                 from 11.6 minutes in fiscal year 2011 and 4.3 minutes in fiscal year
                                 2007.

                             For 2012, as with previous filing seasons, IRS attributes the lower
                             performance and goals to other funding priorities. For information on how
                             IRS sets goals, see our recent report. 4


                             To improve the taxpayer experience and voluntary compliance, IRS has a
Opportunities Exist to       range of options. Some of its options could provide taxpayers with better
Improve the Taxpayer         information to accurately fulfill their tax obligations. Other options would
                             allow IRS to take enforcement actions sooner and with less burden on
Experience and               taxpayers. Simplifying the tax code could reduce unintentional errors and
Voluntary Compliance         make intentional tax evasion harder.


IRS Can Provide More Self-   The recent declines in telephone service and increases in overage paper
Service Tools to Give        correspondence highlight the need to offer more self-service tools to
Taxpayers Better Access to   taxpayers, particularly through IRS’s automated telephone lines and
                             website. Better self-service has the potential to reduce the demand to
Information                  speak to live assistors, a relatively high-cost service, and reduce wait time
                             for taxpayers. To improve the taxpayer experience and help taxpayers
                             meet their obligations voluntarily, we recently recommended and IRS
                             agreed to:

                             •   create an automated telephone line for taxpayers seeking information
                                 on the status of an amended return, a source of high call volume; 5




                             GAO-12-176.
                             4



                             GAO-12-176.
                             5




                             Page 5                                                            GAO-12-652T
                             •   develop an online locator tool listing volunteer tax preparation sites—
                                 IRS introduced an enhanced volunteer site locator tool in 2012; 6 and

                             •   complete an Internet strategy that provides a justification for online
                                 self-service tools as IRS expands its capacity to introduce such tools. 7

                             In addition to actions we recommended, IRS is also studying ways to
                             better communicate with taxpayers and determine which self-service tools
                             would be the most beneficial to taxpayers. According to IRS officials, the
                             study should be completed later this year. Identifying more efficient ways
                             to provide service also benefits IRS because it is able to make better use
                             of scarce resources.


Better Leveraging of Third
Parties Could Provide
Taxpayers With Other
Avenues to Receive
Service
Paid Preparer Regulations    As intermediaries between taxpayers and IRS, paid preparers prepare
                             about 60 percent of all tax returns filed and they play a critical role in
                             answering taxpayers’ questions and filing tax returns. Based in part on
                             our reports and recommendations, IRS is implementing new regulations
                             for paid preparers, such as registration, competency testing and
                             continuing education requirements. 8 IRS’s goals for the preparer
                             regulation program include leveraging relationships with paid preparers
                             and improving the accuracy of the returns they prepare. We recently
                             reported that IRS plans to develop a comprehensive database containing
                             information on paid preparers and the tax returns they prepare. 9 IRS
                             plans to use information from this database to test which strategies are



                             6
                              GAO, Tax Administration: Opportunities Exist for IRS to Enhance Taxpayer Service and
                             Enforcement for the 2010 Filing Season, GAO-09-1026 (Washington, D.C.:
                             Sept. 23, 2009).

                             GAO-12-176.
                             7


                             8
                              GAO, Tax Preparer Regulation: IRS Needs a Documented Framework to Achieve Goal of
                             Improving Taxpayer Compliance, GAO-11-336 (Washington, D.C.: Mar. 31, 2011).

                             GAO-11-336.
                             9




                             Page 6                                                                    GAO-12-652T
                           most effective for improving the quality of tax returns prepared by different
                           types of paid preparers. Likewise, IRS has discussed how to measure the
                           effect of the requirements such as requiring continuing education and
                           testing on tax return accuracy. It will take years to implement the
                           approach as it will likely evolve over time and become more detailed.

Tax Preparation Software   Tax preparation software is another critical part of tax administration.
                           Almost 30 percent of taxpayers use such software to prepare their returns
                           and, in the process, understand their tax obligations, learn about tax law
                           changes, and get questions answered. Many also electronically file
                           through their software provider. Consequently, tax software companies
                           are another important intermediary between taxpayers and IRS. We have
                           reported that IRS has made considerable progress in working with tax
                           software companies to provide, for example, clearer information about
                           why an e-filed return was not accepted, require additional information on
                           returns to allow for IRS to better identify the software used, and enhance
                           security requirements for e-filing. 10 To illustrate the potential for
                           leveraging tax software companies to improve taxpayer compliance, 4
                           years ago we recommended and IRS agreed to expand outreach efforts
                           to external stakeholders and include software companies as part of an
                           effort to reduce common types of misreporting related to rental real
                           estate. 11 In another report, we discussed the value of research to better
                           understand how tax software influences compliance. 12

Volunteer Sites            IRS has volunteer partners, often nonprofit organizations or universities,
                           that staff over 12,000 volunteer sites. Volunteers at these sites prepare
                           several million tax returns for traditionally underserved taxpayers,
                           including the elderly, low-income, disabled, and those with limited English
                           proficiency. In recent reports we have made recommendations about
                           estimating of the effectiveness of targeting underserved populations at
                           such sites and making it easier for taxpayers to find the locations of




                            See GAO-12-176; GAO-11-111; GAO, Tax Administration: Many Taxpayers Rely on Tax
                           10

                           Software and IRS Needs to Assess Associated Risks, GAO-09-297 (Washington, D.C.:
                           Feb. 25, 2009).
                            GAO, Tax Gap: Actions That Could Improve Rental Real Estate Reporting Compliance,
                           11

                           GAO-08-956 (Washington, D.C.: Aug. 28, 2008).

                            GAO-09-297.
                           12




                           Page 7                                                                 GAO-12-652T
                         nearby sites. 13 As is the case with paid preparers, IRS has an opportunity
                         to work with these volunteer partners to help improve assistance to
                         taxpayers with the goal of improving compliance.


Expanded Information     Information reporting is a proven tool that reduces tax evasion, reduces
Reporting Could Reduce   taxpayer burden, and helps taxpayers voluntarily comply. This is, in part,
Taxpayer Burden and      because taxpayers have more accurate information to complete their
                         returns and do not have to keep records themselves. In addition, IRS
Improve Accuracy         research shows that when taxpayers know that IRS is receiving data from
                         third parties, they are more likely to correctly report the income or
                         expenses to IRS. As part of its recent update of its tax gap estimates, IRS
                         estimated that income subject to substantial information reporting, such
                         as pension, dividend, interest, unemployment, and Social Security
                         income, was misreported at an 8 percent rate compared to a 56 percent
                         misreporting rate for income with little or no information reporting, such as
                         sole proprietor, rent, and royalty income.

                         Several major new information requirements have recently taken effect,
                         based at least, in part, on our work and recommendations.

                         •    Brokers are required to report their clients’ basis for securities sales,
                              starting in 2012. 14

                         •    Banks and other third parties are required to report businesses’ credit
                              card and similar receipts, starting in 2011. 15

                         •    Under the Foreign Account Tax Compliance Act, starting in 2014, U.S.
                              financial institutions and other entities are required to withhold a
                              portion of certain payments made to foreign financial institutions that




                          See GAO-12-176; and GAO, Tax Administration: 2007 Filing Season Continues Trend of
                         13

                         Improvement, but Opportunities to Reduce Costs and Increase Compliance Should Be
                         Evaluated, GAO-08-38 (Washington, D.C.: Nov. 15, 2007).
                          GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost Basis Would
                         14

                         Improve Compliance if Related Challenges Are Addressed, GAO-06-603 (Washington,
                         D.C.: June 13, 2006).
                          GAO, Tax Administration: Costs and Uses of Third-Party Information Returns,
                         15

                         GAO-08-266 (Washington, D.C.: Nov. 20, 2007).




                         Page 8                                                                    GAO-12-652T
      have not entered into an agreement with IRS to report details on U.S.
      account holders to IRS. 16

As these three sets of information reporting requirements have only
recently taken effect, it is too soon to tell the impact they are having on
taxpayer compliance.

We have made recommendations or suggested possible legislative
changes in several other areas in which IRS could benefit from additional
information reporting. They include the following:

•     Service payments made by landlords. Taxpayers who rent out real
      estate are required to report to IRS expense payments for certain
      services, such as payments for property repairs, only if their rental
      activity is considered a trade or business. However, the law does not
      clearly spell out how to determine when rental real estate activity is
      considered a trade or business. 17

•     Service payments to corporations. Currently, businesses must report
      to IRS payments for services they make to unincorporated persons or
      businesses, but payments to corporations generally do not have to be
      reported. 18

Broader requirements for these two forms of information reporting,
covering goods in addition to services, were enacted into law in 2010, but
later repealed. We believe the more narrow extensions of information
reporting to include services, but not goods, remain important options for
improving compliance.

Additionally, we have identified existing information reporting
requirements that could be enhanced. Examples include the following:




 GAO, Reporting Foreign Accounts to IRS: Extent of Duplication Not Currently Known,
16

but Requirements Can Be Clarified, GAO-12-403 (Washington, D.C.: Feb 28, 2012).
17
    GAO-08-956.
 GAO, Tax Gap: IRS Could Do More to Promote Compliance by Third Parties with
18

Miscellaneous Income Reporting Requirements, GAO-09-238 (Washington, D.C.:
Jan. 28, 2009).




Page 9                                                                    GAO-12-652T
                          •     Mortgage interest and rental real estate. We recommended requiring
                                information return providers to report the address of a property
                                securing a mortgage, mortgage balances, and an indicator of whether
                                the mortgage is for a current year refinancing when filing mortgage
                                interest statements (Form 1098) could help taxpayers comply with
                                and IRS enforce rules associated with the mortgage interest
                                deduction. 19 We have reported that collecting the address of the
                                secured property on Form 1098 would help taxpayers better
                                understand and IRS better enforce requirements for reporting income
                                from rental real estate. 20

                          •     Higher education expenses. Eligible educational institutions are
                                currently required to report information on qualified tuition and related
                                expenses for higher education so that taxpayers can determine the
                                amount of educational tax benefits they can claim. 21 However, the
                                reporting does not always separate eligible from ineligible expenses.
                                We recommended revising the information reporting form could
                                improve the usefulness of reported information. 22

                          Identifying additional third-party reporting opportunities is challenging.
                          Considerations include whether third parties exist that have accurate
                          information available in a timely manner, the burden of reporting, and
                          whether IRS can enforce the reporting requirement. We have noted, for
                          example, that the reason there is little third-party reporting on sole
                          proprietor expenses is because of the difficulty of identifying third parties
                          that could report on expense like the business use of cars.


Implementing Modernized   Modernized systems should better position IRS to conduct more accurate
Systems Should Provide    and faster compliance checks, which benefits taxpayers by detecting
for Faster Refunds and    errors before interest and penalties accrue. In addition, modernized
                          systems should result in more up-to-date account information, faster
Account Updates           refunds, and other benefits, such as clearer notices so that taxpayers can


                          19
                            GAO, Home Mortgage Interest Deduction: Despite Challenges Presented by Complex
                          Tax Rules, IRS Could Enhance Enforcement and Guidance, GAO-09-769 (Washington,
                          D.C.: July, 29, 2009).
                          20
                              GAO-08-956.
                          21
                              26 U.S.C. § 6050S.
                          22
                              GAO-10-225.




                          Page 10                                                               GAO-12-652T
                           better understand why a return was not accepted by IRS. Two new,
                           modernized systems IRS is implementing include the following:

                           •     Customer Account Data Engine (CADE) 2. For the 2012 filing
                                 season, IRS implemented the first of three phases to introduce
                                 modernized tax return processing systems. Specifically, IRS
                                 introduced a modernized taxpayer account database, called CADE 2,
                                 and moved the processing of individual taxpayer accounts from a
                                 weekly to a daily processing cycle. IRS expects that completing this
                                 first phase will provide taxpayers with benefits such as faster refunds
                                 and notices and updated account information. IRS initially expected to
                                 implement phase two of CADE 2 implementation by 2014. However,
                                 IRS reported that it did not receive funding in fiscal year 2011 that
                                 would have allowed it to meet the 2014 time frame.

                           •     Modernized e-File (MeF). IRS is in the final stages of retiring its
                                 legacy e-file system, which preparers and others use to transmit e-
                                 filed returns to IRS, and replacing it with MeF. Early in the 2012 filing
                                 season, IRS experienced problems transferring data from MeF to
                                 other IRS systems. IRS officials said that they solved the problem in
                                 early February. IRS officials recently reiterated their intention to turn
                                 off the legacy e-file in October 2012 as planned. However, more
                                 recently, IRS processing officials told us they would reevaluate the
                                 situation after the 2012 filing season. 23 MeF’s benefits include
                                 allowing taxpayers to provide additional documentation via portable
                                 document files (PDF), as opposed to filing on paper. In addition, MeF
                                 should generate clearer notices to taxpayers when a return is rejected
                                 by IRS compared to the legacy e-file system.


Expanding Pre-Refund       The Commissioner of Internal Revenue has talked about a long-term
Compliance Checks Could    vision to increase pre-refund compliance checks before refunds are sent
Result in More Efficient   to taxpayers. 24 As previously noted, early error correction can benefit
                           taxpayers by preventing interest and penalties from accumulating. In one
Error Correction
                           example, IRS is exploring a process where third parties would send
                           information returns to IRS earlier so they could be matched against
                           taxpayers’ returns when the taxpayer files the return as opposed to the



                           23
                               GAO-12-566.
                           24
                               GAO-12-176.




                           Page 11                                                             GAO-12-652T
current requirement that some information returns go to taxpayers before
being sent to IRS. The intent is to allow IRS to match those information
returns to tax returns during the filing season rather than after refunds
have been issued.

Another option for expanding pre-refund compliance checks is additional
math error authority (MEA) that Congress would need to grant IRS
through statute. MEA allows IRS to correct calculation errors and check
for obvious noncompliance, such as claims above income and credit
limits. Despite its name, MEA encompasses much more than simple
arithmetic errors. It also includes, for instance, identifying incorrect Social
Security numbers or missing forms. The errors being corrected can either
be in the taxpayers’ favor or result in additional tax being owed.

MEA is less intrusive and burdensome to taxpayers than audits and
reduces costs to IRS. It also generally allows taxpayers who make errors
on their returns to receive refunds faster than if they are audited. This is
due, in part, to the fact that IRS does not have to follow its standard
deficiency procedures when using MEA—it must only notify the taxpayer
that the assessment has been made and provide an explanation of the
error. Taxpayers have 60 days after the notice is sent to request an
abatement.

Although IRS has MEA to correct certain errors on a case-by-case basis,
it does not have broad authority to do so. In 2010, we suggested that
Congress consider broadening IRS’s MEA with appropriate safeguards
against the misuse of that authority. 25 In the absence of broader MEA, we
have identified specific cases where IRS could benefit from additional
MEA that have yet to be enacted. These include authority to:

•    use prior years’ tax return information to ensure that taxpayers do not
     improperly claim credits or deductions in excess of applicable lifetime
     limits, 26




 GAO, Recovery Act: IRS Quickly Implemented Tax Provisions, but Reporting and
25

Enforcement Improvements Are Needed, GAO-10-349 (Washington, D.C.: Feb. 10, 2010).
26
  GAO, 2011 Tax Filing: IRS Dealt with Challenges to Date but Needs Additional Authority
to Verify Compliance, GAO-11-481 (Washington, D.C.: Mar. 28, 2011).




Page 12                                                                     GAO-12-652T
                           •     use prior years’ tax return information to automatically verify
                                 taxpayers’ compliance with the number of years the Hope credit can
                                 be claimed, 27 and

                           •     identify and correct returns with ineligible (1) individual retirement
                                 account (IRA) “catch-up” contributions and (2) contributions to
                                 traditional IRAs from taxpayers over age 70½. 28

                           In 2009, Congress enacted our suggestion that IRS use MEA to ensure
                           that taxpayers do not improperly claim the First-Time Homebuyer Credit in
                           multiple years, which we estimate resulted in savings of about $95
                           million. 29


Reducing Tax Code          Tax code complexity can make it difficult for taxpayers to voluntarily
Complexity Could Ease      comply. Efforts to simplify or reform the tax code may help reduce
Taxpayer Burden and        burdensome record keeping requirements for taxpayers and make it
                           easier for individuals and businesses to understand and voluntarily
Make It Easier to Comply   comply with their tax obligations. For example, eliminating or combining
                           tax expenditures, such as exemptions, deductions, and credits, could help
                           taxpayers reduce unintentional errors and limit opportunities for tax
                           evasion.

                           Frequent changes in the tax code also reduce its stability, making tax
                           planning more difficult and increasing uncertainty about future tax liabilities.
                           Limiting the frequency of changes to the tax code could also help reduce
                           calls to IRS with questions about the changes. We have reported that IRS
                           annually receives millions of calls about tax law changes. 30

                           Reducing complexity in the tax code could take a variety of forms, ranging
                           from comprehensive tax reform to a more incremental approach focusing
                           on specific tax provisions. Policymakers may find it useful to compare any


                           27
                             GAO-10-225. The American Opportunity Tax Credit modified the Hope Tax Credit from
                           tax year 2009 through 2012.The Hope Tax Credit is scheduled to be reinstated in 2013.
                            GAO, Tax Administration: IRS’s 2008 Filing Season Generally Successful Despite
                           28

                           Challenges, although IRS Could Expand Enforcement during Returns Processing,
                           GAO-09-146 (Washington, D.C.: Dec. 12, 2009).
                           29
                               GAO-11-481 and GAO-09-1026.
                           30
                               GAO-11-111.




                           Page 13                                                                   GAO-12-652T
                  proposed changes to the tax code based on a set of widely accepted
                  criteria for assessing alternative tax proposals. These criteria include the
                  equity, or fairness, of the tax system; the economic efficiency, or
                  neutrality, of the system; and the simplicity, transparency, and
                  administrability of the system. These criteria can sometimes conflict, and
                  the weight one places on each criterion will vary among individuals. Our
                  publication Understanding the Tax Reform Debate: Background, Criteria,
                  & Questions may be useful in guiding policymakers as they consider tax
                  reform proposals. 31

                  In closing, improving the taxpayer experience and increasing voluntary
                  compliance will not be achieved through a single solution. Because
                  voluntary compliance is influenced by so many factors, multiple
                  approaches, such as those listed here, will be needed.

                  Chairman Baucus, Ranking Member Hatch, and Members of the
                  Committee, this completes my prepared statement. I would be happy to
                  respond to any questions you and Members of the Committee may have
                  at this time.


                  For further information regarding this testimony, please contact James R.
Contacts and      White, Director, Strategic Issues, at (202) 512-9110 or whitej@gao.gov.
Acknowledgments   Contact points 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 statement include Joanna Stamatiades,
                  Assistant Director; LaKeshia Allen; David Fox; Tom Gilbert; Kirsten
                  Lauber; Sabrina Streagle, and Weifei Zheng.




                   GAO, Understanding the Tax Reform Debate: Background, Criteria, & Questions,
                  31

                  GAO-05-1009SP (Washington, D.C.: September 2005).




                  Page 14                                                                 GAO-12-652T
Appendix I: Selected Internal Revenue
                                            Appendix I: Selected Internal Revenue Service
                                            (IRS) Taxpayer Service Performance Data,
                                            Fiscal Years 2007 through 2013


Service (IRS) Taxpayer Service Performance
Data, Fiscal Years 2007 through 2013
                                            As shown in table 3, in recent years, the level of access to telephone
                                            assistors has declined and average wait time has increased. In addition,
                                            the volume of overage correspondence has steadily increased. On a
                                            positive note, tax law and account accuracy remains high.

Table 3: Selected IRS Taxpayer Service Performance Data, Fiscal Years 2007 Through 2013

                                                                                                                                                2012                2013
Performance measure (in percent)                                2007            2008           2009            2010            2011          planned             planned
Assistor calls
Percentage of callers seeking and receiving live                 82.1            52.8              70              74           70.1                61.0               63.0
assistance
Average wait time (in minutes)                                     4.4           10.4             8.8           10.8            13.0                18.8               18.8
                   a
  Tax law accuracy                                               91.2            91.2           92.9            92.7            93.4                92.7               92.7
                     a
  Account accuracy                                               93.4            93.7           94.9            95.7            96.0                95.0               95.0
Overage paper Correspondenceb (in percent)                          17             23              25              27              35                n/a                 n/a

                                            Legend: n/a = not applicable.
                                            Sources: 2009 and 2010 IRS Oversight Board Annual Reports to Congress and the fiscal year 2013 Congressional Justification for IRS,
                                            and previous GAO reports.
                                            a
                                             Customer accuracy measures how often customers receive correct answers or solutions to their
                                            inquiry from a live IRS assistor. Tax law accuracy refers to callers asking questions about specific tax
                                            laws while account accuracy refers to callers asking questions about their individual accounts.
                                            b
                                             IRS generally considers paper correspondence that is not resolved within 45 days to be overage.
                                            IRS does not have a performance measure for taxpayer correspondence that includes providing
                                            timely service to taxpayers, which we recommended in 2010. See, GAO, 2010 Tax Filing: IRS’s
                                            Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others, GAO-11-111
                                            (Washington, D.C.: Dec. 16, 2010).




                                            Page 15                                                                                                         GAO-12-652T
Appendix II: Internal Revenue Service (IRS)
                                          Appendix II: Internal Revenue Service (IRS)
                                          Telephone Performance Data, January 1
                                          through Early April, 2008 through 2012


Telephone Performance Data, January 1
through Early April, 2008 through 2012
                                          As shown in table 4, access to IRS assistors has declined over the last
                                          few years. IRS officials attribute the higher-than-planned level of service
                                          so far this year to a slight decline in the demand for live assistance. At the
                                          same time, the number of automated calls has significantly increased
                                          which IRS officials attributed in part to taxpayers calling about refunds,
                                          and requesting transcripts (i.e., a copy of their tax return information).

Table 4: IRS Telephone Performance Data, January 1 through Early April, 2008 through 2012

                                                                                                                                        Percentage
                                                                                                                                       change from
Call volume (in millions)                        2007           2008           2009          2010           2011           2012        2011 to 2012
Total calls to IRS                                36.5           40.6          52.4           51.9           56.8           68.2                  20.1
Automated calls answered                          16.0           17.1          19.6           24.3           28.3           37.7                  33.2
Assistor answered calls                           12.3           13.4          14.9           13.8           13.9           11.4                 -18.0
Abandoned, busies, and                             8.2           10.1          17.9           13.8           14.6           19.0                  30.1
disconnects
Performance
Level of service—           Fiscal year           82.0          82.0b         77.0c           71.0           71.0           61.0                       —d
                                a
percentage of callers       goal
seeking live assistance
who receive it
                            Actual to             84.1           79.9          64.3           75.7           75.1           68.1                       —d
                            date
Average wait time           Fiscal year            4.3             4.5         10.4           11.6           11.6           18.8                  62.1
                                a
(in minutes)                goal
                            Actual to              3.9             5.7           8.8            9.5           9.5           15.8                  66.3
                            date
                                          Source: GAO analysis of IRS data.

                                          Note: Data are cumulative for IRS from January 1 of each year to April 7, 2007, April 5, 2008; April 4,
                                          2009; April 10, 2010; April 9, 2011; and April 7, 2012.
                                          a
                                              The goal listed is for the entire fiscal year, not just the period from January 1 through early April.
                                          b
                                           IRS revised its original fiscal year goal of 82.0 percent down to 74.0 percent because of high call
                                          volume caused by economic stimulus-related calls.
                                          c
                                           IRS revised its original fiscal year goal of 77.0 percent down to 70.0 percent because of high call
                                          volume from taxpayers requesting electronic filing authentication information and asking stimulus-
                                          related questions.
                                          d
                                           The difference is 10 percentage points between fiscal year 2011 and 2012 for the goal and 7.0
                                          percentage points for actual performance between 2011 and 2012.




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                                          Page 16                                                                                         GAO-12-652T
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