GAO Reports Improvements in IRS Filing Season Performance

You asked us to provide preliminary information on the President's fiscal year 2017 budget request for IRS and on IRS's 2016 filing season performance. Our briefing objectives were to describe trends in IRS's (1) budget and operations from fiscal year 2011 through the fiscal year 2017 request, including IRS efforts to strategically manage its budget, and (2) performance in providing taxpayer service during the 2016 filing season to date compared to prior years and interim performance of IRS's processing of individual income tax returns.

To describe trends in IRS's budget and operations from fiscal year 2011 through the President's fiscal year 2017 request, we reviewed the President's budget request and IRS's congressional justifications for fiscal years 2011 through 2017 as well as IRS planning documents. This time frame was selected to provide 5 years of full-year data in addition to current year and requested levels. We also included data from fiscal years 2000 to 2016 appropriations adjusted for inflation for context and interviewed IRS budget and operations officials. To describe trends in IRS's performance in providing taxpayer service and processing tax returns, we reviewed IRS filing season performance data for fiscal years 2011 to 2015 and 2016 data through mid-February. We also interviewed IRS officials and industry partners, including major tax preparation and software firms who interact with IRS, on key aspects of the 2016 filing season performance and challenges. To assess data reliability, we reviewed IRS data and documentation, assessed documentation for data limitations, and compared those results to our data reliability standards. We determined that the data presented in this report are sufficiently reliable for our purposes.

We conducted this performance audit from January to March 2016 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.

In summary, we found the following:

• IRS's fiscal year 2016 appropriation increased by $290 million to $11.2 billion over fiscal year 2015 but is about $900 million (7 percent) lower than fiscal year 2011. IRS allocated the funds across 3 appropriation accounts: Taxpayer Services ($176.8 million), Operations Support ($108.2 million), and Enforcement ($4.9 million). For fiscal year 2017, the President requested $12.3 billion in appropriations, about a $1 billion increase (9 percent) over fiscal year 2016 enacted levels. This includes $515 million in a program integrity cap adjustment. Absent legislative approval to spend above the cap, the request is $11.8 billion, a 5 percent increase. However, IRS also may allocate other budgetary resources, such as user fee revenue. In fiscal year 2015, transfers of user fees ($454 million) accounted for 3.8 percent of total available resources ($11,976 million). Full-time equivalents funded with annual appropriations declined by 12,000 (13 percent) between fiscal years 2011 and 2016. After years of taking short-term actions such as limiting hiring and curtailing overtime, IRS is taking steps to strategically manage its resources by identifying priorities in formulating its 2017 budget request. Further, we have open recommendations to IRS -- including 10 priority recommendations -- that would help IRS better manage operations and improve taxpayer service. Implementing these recommendations is a key step in reducing the $385 billion net tax gap, as well as in strengthening tax administration and service to taxpayers.

• Processing of individual income tax returns in 2016 has gone relatively smoothly through mid-February and IRS anticipates improved taxpayer service due, in part, to additional funding. Specifically, IRS projects that the percentage of callers seeking live assistance who receive it (level of service) will increase from about 38 percent for fiscal year 2015 to 47 percent for fiscal year 2016 -- including 65 percent for the filing season. IRS also projects that average telephone wait time will improve from about 31 minutes in fiscal year 2015 to about 26 minutes in fiscal year 2016. However, this will still be about twice as long as the wait times in fiscal year 2011. Nevertheless, IRS has provided improved telephone service through mid-February compared to the same time last year -- level of service was 76 percent (a 33 percentage point increase) while the average wait time dropped to 9 minutes (an improvement of about 70 percent). Importantly, improved customer service, including for telephones, can increase voluntary tax compliance. IRS took steps in 2016 -- including detailing staff from enforcement to customer service and providing overtime -- to help improve service. Finally, IRS is leveraging industry partners to combat identity theft refund fraud and improve cybersecurity efforts to protect taxpayer information.

We provided a draft of this report to the Commissioner of Internal Revenue for review and comment. IRS provided technical comments which were incorporated as appropriate.

As arranged with your office, unless you publically announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to the Chairman and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We will also send copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, and other interested parties. The report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact us at (202) 512-9110 or mctiguej@gao.gov or lucasjudyj@gao.gov. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report were Tom Gilbert, Assistant Director; Joanna Stamatiades, Assistant Director; James Cook; Laurie King; Melissa King; Erin Saunders Rath; and Elwood White.

• IRS Budget: To describe trends in IRS's budget and operations from fiscal year 2011 through the President's fiscal year 2017 request, we reviewed the President's budget request and IRS's congressional justifications for fiscal years 2011 through 2017 as well as IRS planning documents. This time frame was selected to provide 5 years of full year data in addition to current year and requested levels. We also included data from fiscal years 2000 to 2016 appropriations adjusted for inflation for context and we interviewed IRS budget and operations officials.

• 2016 Filing Season Performance: To describe trends in IRS's performance in providing taxpayer service and processing tax returns, we reviewed IRS filing season performance data for fiscal years 2011 to 2015 and 2016 data through mid-February. We also interviewed IRS officials and selected industry partners -- including major tax preparation and software firms who interact with IRS on key aspects of the filing season -- on 2016 filing season performance and challenges.

• To assess data reliability, we reviewed IRS data and documentation, assessed documentation for data limitations, and compared those results to our data reliability standards. We determined that the data presented in this report are sufficiently reliable for our purposes. IRS provided technical comments on the content of the briefing which were incorporated, as appropriate.

• IRS's fiscal year 2016 appropriation increased by $290 million to $11.2 billion over fiscal year 2015 but is about $900 million (7 percent) lower than fiscal year 2011.

• • IRS allocated the funds across 3 appropriation accounts: Taxpayer Services ($176.8 million), Operations Support ($108.2 million), and Enforcement ($4.9 million).

• For fiscal year 2017, the President requested $12.3 billion in appropriations, about a $1 billion increase (9 percent) over fiscal year 2016 enacted levels.

• • This includes $515 million in a program integrity cap adjustment. Absent legislative approval to spend above the cap, the request is $11.8 billion, a 5 percent increase.

  • IRS may also allocate other budgetary resources, such as user fee revenue. In fiscal year 2015, transfers of user fees ($454 million) accounted for 3.8 percent of total available resources ($11,976 million).

• Full-time equivalents funded with annual appropriations declined by 12,000 (13 percent) between fiscal years 2011 and 2016.

• After years of taking short-term actions such as limiting hiring and curtailing overtime, IRS is taking steps to strategically manage its resources by identifying priorities in formulating its 2017 budget request. Implementing our open recommendations can also help IRS achieve its priorities.

• Processing of individual income tax returns in 2016 has gone relatively smoothly through mid-February and IRS anticipates improved taxpayer service due, in part, to the additional funding.

• • Specifically, IRS projects that

  • • the percentage of callers seeking live assistance who receive it (level of service) will increase from about 38 percent for fiscal year 2015 to 47 percent for fiscal year 2016 -- including 65 percent for the filing season, and

    • the average telephone wait time will improve some from about 31 minutes for fiscal year 2015 to about 26 minutes for fiscal year 2016. However, this will still be about twice as long as the wait time for fiscal year 2011.

  • IRS has provided improved telephone service through mid-February compared to the same time last year -- level of service was 76 percent (a 33 percentage point increase) while the average wait time dropped to 9 minutes (an improvement of about 70 percent).

• Importantly, improved customer service, including for telephones, can help increase voluntary tax compliance. IRS took steps in 2016 -- including detailing staff from enforcement to customer service and providing overtime -- to help improve service. Finally, IRS is leveraging industry partners to combat identity theft refund fraud and improve cybersecurity efforts to protect taxpayer information.

Objective 1

 

 

Adjusting for Inflation, IRS's Appropriations for

 

Fiscal Year 2016 Are Near the Fiscal Year 2000 Level

 

 

Figure 1: IRS Appropriations Nominal and Inflation Adjusted

 

(2015 Dollars, in Millions), from Fiscal Years 2000 to 2016

 

 

 

Note: Inflation adjustments were made using Bureau of Economic Analysis data and CBO projections of the fiscal year chain weighted GDP price index.

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Figure 2: IRS Funding In Fiscal Years 2011

 

through 2016 and 2017 Request

 

(Dollars in Millions)

 

 

 

Notes: FY = fiscal year. Dollars are nominal and not adjusted for inflation, and numbers may not add due to rounding.

The Consolidated Appropriations Act of 2016, division E, section 113, gave IRS authority to allocate the $290 million to the Taxpayer Services, Operations Support, and Enforcement accounts.

Fiscal year 2013 enacted represents the operating level after applying across-the-board rescission and reductions required by sequestration. In fiscal year 2012 and thereafter, amounts appropriated for Health Insurance Tax Credit Administration, which had been a separate account, were moved to the Taxpayer Services appropriation.

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Figure 3: IRS Full-time Equivalents,

 

Fiscal Years 2011 through 2015 Actual,

 

2016 Enacted, and 2017 Requested

 

 

 

Notes: FY = fiscal year. FTE = full-time equivalent. Total FTEs include FTEs funded with other budgetary resources, such as user fees. The administrative resources for the Health Insurance Tax Credit Administration were moved to the Taxpayer Services appropriation.

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Figure 4: IRS User Fee Transfers to Appropriation Accounts,

 

Fiscal Years 2011 through 2015 Actual, and 2016 and 2017 Estimated

 

(Dollars in Millions)

 

 

 

Notes: FY= fiscal year. This figure depicts the amount transferred to each account from the Miscellaneous Fee Fund. This amount may differ from actual obligations in a given year.

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Figure 5: Patient Protection and Affordable Care Act

 

Spending by Account, Fiscal Years (FY) 2010 to 2015

 

(Dollars in Millions)

 

 

 

Notes: FY = fiscal year. PPACA was enacted and subsequently amended by the Health Care and Education Reconciliation Act of 2010. Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010); Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). IRS's user fee revenue must be transferred to an appropriation account to Page 11 be obligated.

• In a December 2015 letter to IRS, we identified 11 of our approximately 200 open recommendations to IRS as being the highest priority for implementation; 10 of these remain open.

• • Three recommendations aimed at improving IRS's budget formulation (GAO-14-605), resource allocation decisions (GAO-13-151), and oversight of the multi-billion dollar information technology (IT) investment (GAO-14-298).

  • Two recommendations (one of which has now been implemented, GAO-14-633) focused on collecting more information to further combat identity theft (GAO-15-119).

  • Four recommendations would help better position IRS to respond to changing business models or make improvements to key programs (GAO-14-732, GAO-14-453, GAO-14-479, and GAO-15-514).

  • Two recommendations would improve taxpayer service (GAO-13-435 and GAO-15-163).

• IRS reported to us that it has identified points of contact for each recommendation and is working internally to respond.

• Implementing these recommendations is a key step in reducing the $385 billion net tax gap, as well as in strengthening tax administration and service to taxpayers.

• Of the 11 priority recommendations, 6 relate to budget and filing season issues discussed in this briefing.

• Understanding non compliant taxpayer behavior and developing approaches to deter and change it. (Theme 2: $399 million, all of which is above the spending cap)

• Facilitating voluntary compliance by empowering taxpayers with secure and innovative tools and support. (Theme 1: $263 million, including $8 million above the spending cap)

• Maintaining current operating levels, changes to the base ($167 million, all of which is below the spending cap)

• Driving more agility, efficiency, and effectiveness in IRS operations. (Theme 6: $121 million, of which $102 million is above the spending cap)

• Strengthening cybersecurity and eliminating identity theft. (Focus Area: $90 million, all of which is below the spending cap)

• The 2016 filing season began on time on January 19 and IRS officials said that tax extenders² were implemented without significant challenges. As of February 26, 2016, IRS had processed about 56 million individual tax returns as well as 47 million refunds totaling $142 billion.

• IRS is processing additional PPACA forms beginning in 2016. According to IRS and industry officials, this change is being implemented smoothly with no significant disruptions reported.

• While IRS experienced a major system failure in February that halted returns processing for about a day, it had minimal effect on overall processing of returns and refunds.

• Industry partners we spoke with agreed that the filing season has proceeded smoothly as of early February and communication with IRS is better than in prior years.

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Figure 6: IRS Telephone Level of Service and

 

Average Telephone Wait Time, Fiscal Year 2011

 

through Fiscal Year 2016 Performance Forecast

 

 

 

• IRS plans to use 200 FTEs from one of its compliance functions to answer telephone calls in 2016. IRS officials believe this step was necessary because funding came too late in the year to hire and train assistors to cover the filing season. Improved customer service can positively affect voluntary tax compliance.

• IRS plans to provide 600 FTEs of overtime for assistors to respond to correspondence and telephone calls in fiscal year 2016 compared to fewer than 60 FTEs for all of fiscal year 2015.

• Average wait time significantly increased from about 8 to 31 minutes (or about 290 percent) between fiscal years 2011 and 2015.

• Total volume increased from about 185,600 to 986,100 calls (431 percent) between the 2011 and 2015 filing seasons.

Figure 7: IRS Identity Theft Call Volume and

 

Performance for Filing Seasons 2011 through

 

2015 and 2016 Performance Forecast

 

 

 

Note: Data are cumulative from January 1 of each year to April 2, 2011; March 31, 2012; March 30, 2013; March 29, 2014; March 28, 2015. IRS did not forecast all 2016 call volume data.

• IRS convened a Security Summit in 2015 to leverage industry -- including tax preparation companies, state tax agencies, and others -- to combat identity theft.

• IRS is taking action on key items from the summit including:

• • collecting additional data for fraud filters,

  • forming active working groups for ongoing efforts, and

  • conducting educational campaigns.

Given additional resources in fiscal year 2016, IRS has taken steps to improve service and operations in key areas. However, additional funding is not the only solution. IRS has flexibility in how it allocates resources -- including user fee revenue -- to ensure that its resources are used effectively. After years of taking short-term actions such as limiting hiring and curtailing overtime, IRS is taking steps to strategically manage its resources by identifying priorities in formulating its 2017 budget request. Further, we have open recommendations to IRS -- including 10 priority recommendations -- that would help IRS better manage operations and improve taxpayer service.

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² Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, div. Q, 129 Stat. 2242 (Dec. 18, 2015).