This report contains Internal Audit’s assessment of the processes the Service employed to ensure a successful 1998 filing season. We conducted reviews that analyzed how the Service prepared for the filing season, processed tax returns (both paper and electronic individual tax returns), and provided taxpayers customer assistance at walk-in sites. Our overall objective was to evaluate the success of the filing season in meeting the needs of taxpayers in the areas of processing tax returns, issuing timely refunds and answering taxpayer questions. In particular, we looked at what steps the Service has taken and can take to meet the commissioner's goal of providing first-rate service to taxpayers.

Overall, the Service had a successful filing season. This success included significant increases in the number of returns filed electronically, implementation of a number of tax law changes, and significant improvements in customer service through expansion of toll-free telephone service and the introduction of Saturday walk-in service. In addition, the Service was able to process returns accurately and issue refunds timely. These are significant accomplishments in meeting taxpayer needs and in improving customer service.

Our review identified process improvements needed in the following four areas that will assist in ensuring success in 1999 and future filing seasons.

The Service saw excellent growth in the number of electronic returns filed that far surpassed the goals for 1998. This can be attributed to a number of factors including the extensive efforts by the Service to encourage taxpayers to file electronically. However, many barriers still exist that inhibit future growth. The goal of 80 percent of tax returns to be electronically filed by the year 2007 poses a difficult challenge and will require elimination of barriers such as, the additional costs to electronically file and the requirements to mail in signature documents and W-2 statements. The draft strategic plan for Electronic Tax Administration discusses these and other barriers and includes plans to address them. Although this long-range strategy is an excellent start, we have reported some of the difficulties the Service faces in overcoming barriers. Our review also identified ways that could encourage more electronic filing (pages 3-8).

We looked at the process of tax return filing from the taxpayer's point of view and how it could be made easier. Our review showed that the Service can improve the overall process used to evaluate requirements placed upon taxpayers by the various tax laws and publications. Some changes which would make filing easier and reduce taxpayer burden include (1) a simpler and shorter tax return, (2) a larger dollar tolerance for requiring a separate schedule for interest and dividends, and (3) allowing only "whole dollar entries" on tax returns. This would allow millions of taxpayers to file simpler returns with less lines and fewer schedules (pages 8-13).

3. IMPROVING cUSTOMER SERVIcE

The Service greatly expanded customer service during the 1998 filing season through extended hours for toll-free telephone service and "Saturday service" for both telephone and walk-in assistance. Our review identified additional areas where customer service can be improved in the areas of walk-in assistance, taxpayer instructions, and taxpayer correspondence. This includes adding a structured process to quickly identify and react to taxpayer and IRS processing problems during the filing season (pages 13-19).

4. cHALLENGES FOR THE 1999 FILING SEASON

The Service faces major challenges for 1999. These include the major systems changes required for the century date conversion to year 2000 and the impact from the Taxpayer Relief Act of 1997. In addition, the Service will be making significant changes to equipment processes with the consolidation of the agency's computer mainframes and replacement of the Distributed Input System and Remittance Processing System in the service centers.

The Service has recognized the high risk of these challenges and has already begun the readiness process for the 1999 filing season. Several readiness meetings have been held and actions already taken. It is critical that key members from all IRS functions are represented and actively participate in these meetings. We found that this did not always occur during the 1998 filing season readiness meetings. The lack of consistent attendance by key members could delay discussion of important issues and actions that need to be taken (pages 19-20).

To enhance electronic filing, simplify return filing, improve customer service and meet the challenges of the 1999 filing season, the Service should:

• Taking additional steps to encourage TeleFile and On-Line filing by addressing known barriers to these systems.
• Establishing a taxpayer profile database to allow for quicker verification of taxpayer account information.

• Proceeding with development of Personal Identification Numbers to eliminate the need for signature documents and to provide additional filing opportunities.

• Eliminating the extra burden placed on taxpayers with balance due returns who file electronically.

2. Improve the process the Service uses to evaluate the burden placed upon taxpayers by the various tax laws and publications. To simplify return filing and reduce taxpayer burden, the Service should consider:

• Providing many taxpayers, whose main source of income is from wages, a simpler, shorter tax return.

• Raising the dollar tolerance for interest and dividends from $400 to $1,000.

• Requiring "whole dollars only" for all tax return entries.

2. Implement an additional structured process to quickly identify and react to taxpayer and IRS process problems during the filing season. To save costs in design and implementation, the Service should consider modifying the Program Analysis System (PAS).

Management's Response: The chief Operations Officer agreed to explore the possibility of providing a simpler tax form for millions of taxpayers, to explore raising the dollar tolerance on interest and dividends for submitting a separate schedule, and to further evaluate establishing a taxpayer profile database. Our recommendation to use "whole dollars only" for all tax return entries to reduce processing errors and taxpayer burden will require congressional approval. The Service should go forward and ask congress to consider this recommendation.

The Service is taking several actions next filing season to enhance electronic filing, but management did not believe our recommendations to increase TeleFile would encourage more taxpayers to use TeleFile. However, to reach the electronic filing goal of 80 percent, the Service will need to aggressively explore additional ways to encourage more taxpayers to file electronically.

Management did not agree that the Service should implement a structured process to quickly identify and react during the filing season to taxpayer and IRS processing problems. Management stated that our suggestion to modify the Program Analysis System (PAS) would not be a feasible vehicle to quickly identify these problems and could not be modified to correct errors and alert taxpayers in a timely fashion. We remain concerned that the Service does not have an adequate process to quickly identify and react to taxpayer and IRS processing problems during the filing season. For the 1999 filing season, numerous tax law changes will affect millions of taxpayers. In order to provide quality customer service, it is imperative that the Service determine early in the filing season whether taxpayers understand new tax forms and instructions and whether the forms are being correctly processed. Responses to the draft Internal Audit report are included in Attachment III.