The Internal Revenue Service (IRS) processes over 200 million returns while collecting tax revenues totaling $1.7 trillion each year. Although such figures make the IRS the largest processor of tax data in the world, efforts to modernize its processing systems remain constrained since most tax returns are filed on paper rather than electronically using a computer.

The United States Congress recognized the importance of electronic filing in the IRS Restructuring and Reform Act of 1998 (RRA 98). Two important requirements of this legislation include a long-range goal to have 80 percent of all federal tax and information returns filed electronically by 2007 and to have all paper returns that are prepared using a computer filed electronically by 2003. Increasing electronic filing improves tax return processing by significantly reducing errors and labor costs and is essential for modernization to be effective.

The IRS’ Electronic Tax Administration (ETA) budget for Fiscal Year 2000 was over $100 million. Much of this was used to implement the 1999 ETA Strategic Plan, A Strategy for Growth, which described how the IRS plans to achieve its electronic filing goals. To independently assess results derived from the strategic plan, the Congress required the IRS to establish the Electronic Tax Administration Advisory Committee (ETAAC) to periodically report on electronic filing progress. Committee members are comprised of non-federal government employees selected from various private sector communities.

This audit was conducted to determine whether the IRS adequately addressed the electronic filing requirements of the RRA 98 and established appropriate timelines and oversight to ensure these requirements were met.

The IRS established a framework for accomplishing its electronic filing goals in the ETA Strategic Plan, but the probability of meeting these goals remains questionable. From 1998 to 1999, the IRS increased the number of electronically filed returns over 19 percent for individual returns and 56 percent for information returns. During 2000, it also experienced an increase in electronic filing. For example, electronically filed individual returns increased from 23.4 percent in 1999 to 28 percent in 2000.

While this is a noteworthy accomplishment, achieving the RRA 98 interim goal to have all returns prepared using a computer to also be filed electronically by 2003 is not probable. It is also questionable whether the IRS can accomplish the RRA 98 goal to have 80 percent of all tax returns filed electronically by 2007. To succeed will require a sustained and substantial effort by the IRS to increase the number of electronically filed returns over the next 7 years.

(In Millions)

The IRS should improve its strategic planning process. Its ETA Strategic Plan communicated the ETA mission, goals and strategies, market opportunities, and challenges for growth. It also included 43 projects, many with implementation schedules spanning multiple years. However, the plan did not include incremental project milestones or sufficient performance measures to evaluate each initiative’s progress or its ultimate impact on electronic filing.

The ETA Strategic Plan should also clearly define the impact of information returns filed on magnetic media. These returns will significantly affect the IRS’ ability to achieve its electronic filing goals because banks and employers will need to convert over one billion returns from magnetic tape to electronic filing within the next 7 years. The plan did not adequately distinguish between those returns filed electronically versus those received on magnetic tape.

In January 2000, the IRS reviewed the ETA strategy and identified the need to focus its efforts on the most critical issues. In addition, the IRS received meaningful feedback from the ETAAC. The ETAAC’s June 2000 report emphasized that the past increases in the electronic filing rate must be sustained and suggested establishing new initiatives to help achieve the growth rate necessary to accomplish ETA filing goals in future years. By addressing these concerns and implementing enhancements in the strategic planning process, the IRS should increase the likelihood that its vision for electronic filing becomes a reality.