This review was conducted as part of the Treasury Inspector General for Tax Administration’s (TIGTA) Fiscal Year 2001 audit plan. Millions of eligible taxpayers did not use TeleFile to file their Individual Income Tax Returns with the Internal Revenue Service (IRS). Therefore, we conducted this audit with two objectives.

• To evaluate whether decisions by the IRS to discontinue mailing TeleFile Tax Record and Instructions (TeleFile packages) would contribute to taxpayers not using TeleFile.
• To evaluate whether the IRS had sufficiently determined the reasons eligible taxpayers were not using TeleFile.

To accomplish these objectives, we evaluated information obtained primarily from the IRS Headquarters and the IRS Intranet. We analyzed the information to determine the basis and impact of the IRS decision to discontinue the mail-out of TeleFile packages for certain taxpayers. We also evaluated the information the IRS had pertaining to why TeleFile eligible taxpayers did not use TeleFile or had stopped using TeleFile. We conducted our review at the Fresno Campus from October 2000 through April 2001 in accordance with Government Auditing Standards.

Major contributors to this report are listed in Appendix I. Appendix II contains the Report Distribution List. Appendix III contains our Outcome Measures.

The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) states that one policy of the Congress is for the IRS to promote paperless filing. The long-range goal is to have at least 80 percent of all Federal tax and information returns filed electronically by the year 2007. However, in November 2000, the IRS projected that only 51 percent of the Individual Income Tax Returns would be filed electronically by the year 2007.

The Congressional intent expressed in RRA 98 was for the IRS to continue to offer and improve the TeleFile Program. The IRS function responsible for the TeleFile Program is called the Electronic Tax Administration (ETA). Part of the ETA function is to identify barriers that prevent taxpayers from filing electronically. In an ETA program document for 2000, ETA had cited a potential near-term application of expanding TeleFile to its fullest potential use and to use it as a model product to enhance consumer acceptance of other Electronic Tax Administration programs.

TeleFile packages are sent to potentially eligible taxpayers based on their prior year return information including age, income, and dependent criteria. Some of the advantages of TeleFile are:

• TeleFile is an interactive program requiring only a touch-tone telephone that allows eligible taxpayers to file simple Federal tax returns with the IRS, 24 hours a day, 7 days a week. Filing returns using TeleFile takes an average of only 11 minutes and is completely paperless for the taxpayer.
• TeleFile is free. Taxpayers do not have to pay professional return preparation fees and do not have to purchase computers or tax software. This is important because TeleFile primarily includes lower income taxpayers. For example, for Tax Year 1998, almost 54 percent of the TeleFile taxpayers earned less than $15,000.

Approximately 60 percent of TeleFile eligible taxpayers did not use TeleFile according to IRS statistics for Tax Years 1997 through 1999. This included approximately 7.5 million taxpayers for Tax Year 1999. For Tax Year 1999, approximately 5.2 million taxpayers used TeleFile to file their individual tax returns, down from approximately 5.7 million for Tax Year 1998 and 5.9 million for Tax Year 1997.

The IRS has taken actions to reduce the cost of the TeleFile mail-outs, but these actions will result in the further decline in the number of taxpayers who are using TeleFile. These actions have been taken without contacting a sample of the affected taxpayers to determine why eligible taxpayers were not using, or stopped using, TeleFile.

The IRS decided to discontinue the TeleFile package mail-out for two categories of taxpayers. However, this could reduce the number of taxpayers using TeleFile by 690,000.

• Beginning with Tax Year (TY) 2000 TeleFile packages, the IRS discontinued mailing packages to taxpayers whose prior year return had been prepared by paid individuals. This included over 6.6 million taxpayers for TY 2000 and the IRS estimated this reduced the number of taxpayers filing TY 2000 TeleFile returns by a minimum of 330,000.
• Beginning with TY 2001, the IRS plans to discontinue TeleFile package mail-out to taxpayers who had been eligible to but had not used TeleFile during the prior 2 years. The IRS estimates this will reduce the number of TeleFile packages mailed by over 3 million, and the number of taxpayers using TeleFile for TY 2001 by 360,000.

Included in the 6.6 million taxpayers previously mentioned were approximately 1 million taxpayers who had never been given the option of using TeleFile. Taxpayers have to file a "first" tax return before the IRS can send a TeleFile package to potentially eligible taxpayers. However, of the 6.6 million taxpayers who were excluded from receiving the TY 2000 TeleFile package, approximately 1 million filed for the first time for TY 1999. Consequently, the IRS never gave these taxpayers the chance to file their TY 2000 returns using TeleFile.

In addition, we were informed that the IRS had not surveyed taxpayers from these two categories to determine the reasons why taxpayers were not using TeleFile. In recent years, information from IRS initiated contacts with taxpayers regarding TeleFile non-use was available from two main sources, the annual vendor satisfaction surveys and March 2001 focus groups.

However, the 2 annual satisfaction surveys (with approximately 70 taxpayers in each year) and the focus groups (approximately 30 total participants in 4 metropolitan areas) had common drawbacks. These drawbacks included the small number of taxpayers contacted and sample results that cannot be applied to taxpayers nationwide.

The IRS stated the reason for wanting to discontinue TeleFile package mail-out for the two categories of taxpayers was that it would not be cost efficient because the IRS expected a relatively low participation rate.

As of April 2001, the IRS still planned to discontinue TeleFile package mail-out in subsequent years for these two categories of taxpayers. Taxpayers who do not receive a TeleFile package cannot use the TeleFile Program to file their returns. Taxpayers in future years that meet the criteria for these two categories will be prevented from receiving a TeleFile package.

1. Electronic Tax Administration management should reverse its decision to discontinue mailing TeleFile packages to the two categories of taxpayers based on the Congressional intent for the IRS to offer and improve the TeleFile Program.

Management’s Response: The IRS stated that it would not implement our recommendation because it is not cost effective. In addition, the IRS stated that it did not believe that implementing our recommendation would result in program improvements.

Office of Audit Comments: The IRS response indicates that management recognizes that discontinuing TeleFile package mail-out to the two categories of taxpayers will prevent approximately 690,000 taxpayers from using TeleFile to file their returns. We believe that the IRS decision reduces IRS costs at the expense of taxpayer service. (Note: Using the IRS cost figures provided to us during our review, the cost would be approximately $2.4 million instead of $4 million.) TeleFile is free for eligible taxpayers, and is fast and paperless. Not implementing our recommendation will adversely affect taxpayer service by preventing an estimated 690,000 taxpayers in the two categories from using TeleFile to file their returns.

In our opinion, the IRS decision will hinder the RRA 98 mandate because it contributes to the declining TeleFile volumes. As stated in our report, TeleFile volumes declined from 5.9 million to 5.2 million from TY 1997 to TY 1999. The IRS decision to discontinue TeleFile package mail-out contributed to an additional decline in TY 2000 by preventing an estimated 330,000 taxpayers from using TeleFile and will prevent an estimated 360,000 taxpayers from using TeleFile for TY 2001.

Finally, surveys and targeted outreach efforts to increase participation might result in increased TeleFile use that would make TeleFile package mail-out to the taxpayers in these two categories as cost effective as for other categories of taxpayers.

2. The IRS should identify TeleFile eligible taxpayers not using TeleFile and eligible taxpayers who stopped using TeleFile. The IRS should then conduct targeted surveys of sufficient scope (sample sizes, geographical locations, and relevant questions) to determine the main barriers that prevent eligible taxpayers from using TeleFile. The information could then be used for specific outreach efforts to overcome the identified barriers.

Management’s Response: The IRS stated that the focus group results supported internal IRS studies (based on database analyses) that were a major component in determining the scheduled improvements to the TeleFile Program for the 2002 Filing Season.

Office of Audit Comments: We do not question the IRS’ use of internal database analyses and the focus group results in attempts to improve the TeleFile Program for the 2002 Filing Season. However, the IRS response does not directly relate to our recommendation. Our recommendation pertains to the need for taxpayer contacts targeted to the major TeleFile non-use categories in addition to the two cited in our first recommendation, with specific outreach efforts for each category in attempts to overcome limitations keeping eligible taxpayers from using TeleFile. We do not believe that discussions with the approximately 30 taxpayers in the focus groups and the approximately 70 taxpayers in the annual satisfaction surveys were sufficient to determine the main reasons why approximately 60 percent of TeleFile eligible taxpayers for TYs 1997 through 1999 did not use TeleFile. This included approximately 7.5 million taxpayers for TY 1999. We do not believe that IRS database analysis is a substitute for taxpayer contacts because it does not provide information about why eligible taxpayers do not use TeleFile or why they stopped using it.

The IRS can do more to meet Congressional intent to offer and improve TeleFile. We believe the IRS is partly moving away from Congressional intent by not offering TeleFile to all eligible taxpayers and by not obtaining sufficient information to overcome barriers that cause taxpayers not to use TeleFile. Increasing TeleFile use would reduce taxpayer burden including saving American taxpayers millions of dollars because TeleFile is cost free.

Walter E. Arrison, Assistant Inspector General for Audit, Wage and Investment Income Programs

Stanley C. Rinehart, Director

Richard J. Calderon, Audit Manager

John Kirschner, Senior Auditor

Larry A Mart, Senior Auditor

Deputy Commissioner N:DC

Director, Electronic Tax Administration W:ETA

Director, Individual Electronic Filing W:E:IEF

Director, Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O

Chief Counsel CC

National Taxpayer Advocate TA

Office of Management Controls N:CFO:F:M

ETA Audit Liaison W:E:DEF:RA

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

Taxpayer burden – Potential; an estimated 690,000 individual taxpayers would use TeleFile to file their returns if the Internal Revenue Service (IRS) were to reverse its decision to discontinue the TeleFile package mail-out for the two categories of taxpayers (see page 3).

Methodology Used to Measure the Reported Benefit:

The number of affected taxpayers is based on IRS estimates for the two categories of taxpayers that had, or will have, discontinued TeleFile packages.

The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.