have not seen anything that gives us reason to believe that electronic filing will continue to grow at that pace after 1996.

As we also discussed in our October 1995 report, it is important to focus not only on the number but on the types of returns being filed electronically. Until now, the returns being filed electronically are generally the less complex individual income tax returns-those that contribute least to IRS' paper-processing workload and operating costs. For example, the returns being filed via TeleFile, which accounted for most of the growth in electronic filing in 1996, would have been filed in the past on Form 1040EZ-a one-sided, one-page form. Electronic filing has not yet attracted a representative number of taxpayers who file the more complex, multi-page, individual income tax returns (those filed on Form 1040) and business returns, such as those filed by corporations and partnerships.

Question 6: After three years of unsatisfactory financial audits, what specific steps should the IRS take to fix its financial management problems and when should the IRS be expected to fully comply with the requirements of the Chief Financial Officer Act?

GAO Response: The core problems we have found in performing the financial statements audits of the IRS are its inability to

-properly account for the about $1.3 trillion in tax revenues it reported -reliably determine the amount of accounts receivable owed for unpaid taxes,

-reconcile its Fund Balance with Treasury accounts, and provide evidence that goods and services purchased are received and, in cases where evidence was found, to ensure that the item purchased was recorded in the proper period.

The problems that need to be corrected have persisted because of a lack of discipline and the failure to sustain a priority focus on implementing corrective actions. For example, only in the last year or so has IRS begun to concentrate its efforts on attempting to identify its accounts receivable and fully documenting and correcting the problems in its revenue accounting system, even though these problems were identified in our first audit for fiscal year 1992.

Prior to the current efforts, IRS focused on ad hoc attempts at finding solutions to allow for an audit opinion rather than on correcting the core underlying financial management problems. These underlying problems were evidenced most by IRS' lack of a documented, comprehensive understanding of how its systems to account for its accounts receivables and revenues worked. As a result, IRS' priority should be on developing a focused corrective action plan designed to fix the underlying financial management problems-as discussed below-and senior management intervention to ensure that the plan is followed to completion in a disciplined, rigorous manner. IRS recently gave us its corrective action plan. However, based on our preliminary review, we are concerned that this plan does not properly focus on fixing the underlying financial management problems; rather, it emphasizes proposed efforts to obtain an audit opinion. We will be following up with IRS shortly to provide our specific feedback on its plan.

We believe that with a good plan and close supervision from IRS' senior management to ensure that the plan is strictly adhered to, IRS should be able to comply with the CFO Act for the fiscal year ended 1996. The following discussion more fully explains the underlying financial management problems listed above and provides the status of IRS' efforts to correct the problems.

The first problem IRS must address is its accounting for the $1.3 trillion in tax revenues reported. IRS has not been able to reconcile the amounts of revenue in its detailed subsidiary records to summary amounts recorded in its general ledger. This situation is due, primarily, to IRS not having a full understanding of the systems used to track its revenues. Therefore, it does not fully know why information in the summary records may not be in the detailed taxpayer records, and vice versa. To remedy this problem, IRS has begun to develop its understanding of the revenue accounting process in detail. To identify the information needed to reconcile its records and ensure a complete and proper accounting for all revenues received, IRS has developed documentation to support its understanding and to determine the necessary changes and enhancements to computer programs that process revenue information.

Further, IRS has not been able to match these revenues to the appropriate trust fund or account. IRS' fundamental problem in properly distributing revenue receipts is that it is not clear in which accounts amounts are to be deposited. For example, the federal tax deposit coupon used by employers to transmit payments of income tax withholdings and social security taxes reports the two taxes as a single tax class. As a result, at the time of receipt, IRS does not know what portion of the

collections is to be applied to federal income tax withholdings versus social security taxes. IRS does not receive this detail or know the amounts of taxes that should have been paid until the employer files a quarterly return. The application of receipts is further complicated if the payments previously made do not equal the tax liability on the quarterly return filed and it is unclear to which account any difference should be applied. This is also exacerbated by the time it takes for IRS to determine if the amount received was correct.

As a short-term solution to identifying the proper recipient of the revenues received, IRS is developing methodologies to apply receipts in order of priority. In the long term, the new federal tax deposit system being implemented by Treasury's Financial Management Service and IRS, known as the Electronic Federal Tax Payment System (EFTPS), appears to have the capacity to capture the detailed information required to identify the proper recipient of the tax payments at the point of payment. However, it is unclear if IRS intends to use EFTPS to obtain more detailed information along with the payment. Further, not all employers will be required to use the system.

Another problem facing IRS is its accounting for tax accounts receivable. IRS' current system was not designed to track its tax accounts receivable properly. IRS tracks all outstanding assessments-financial accounts receivable and compliance assessments 5-together. For valid reasons, the outstanding assessment amount greatly overstates the amounts of unpaid taxes owed that IRS can expect to collect. Also, the method used to derive the amount of accounts receivable does not provide information on the composition of the total or the reasons for the change in receivables from period to period, which would allow IRS to better manage its collection efforts. Further, the system does not readily provide the information needed to assess the collectability of the amounts actually owed.

IRS has made some progress in addressing these problems. For fiscal year 1995, IRS developed a methodology to sort the inventory of its uncollected assessments into compliance assessments and financial receivables. We tested IRS' methodology and found that while the methodology appeared to be sound, the data upon which the analysis was based were flawed. Without reliable data, IRS cannot effectively measure the amount outstanding or determine how to manage its inventory of accounts receivable.

Another problem IRS must address is reconciling its Fund Balance with Treasury accounts. To correct this problem, IRS hired a contractor to determine the differences between amounts in its general ledger fund balance accounts and its fund balance accounts maintained at Treasury, and the source of the differences. IRS also established a unit to manage the reconciliation of these accounts on an ongoing basis. To complete the reconciliation of its accounts, however, IRS must finish researching the differences and make the proper adjustments to its accounts or initiate corrections to Treasury's accounts for the remaining differences. Similar efforts are required to clear amounts in its budget clearing and suspense accounts.

Finally, IRS must implement controls to ensure that it is properly accounting for operating expenses incurred. IRS must ensure that it has received and accepted goods and services that it orders and that the payments for these goods and services are properly accounted for, especially those purchased for other federal agencies. The action plan that IRS recently gave to us identifies some actions they propose to take to correct this problem.

We are currently reviewing those actions to determine whether they adequately address the underlying financial management problem.

Question 7: What is the status of IRS' growing accounts receivables? Can the IRS accurately measure the amount outstanding, and what can it do to better collect this amount?

GAO Response: Currently, we do not know the status of IRS' growing accounts receivables. IRS does not have a way to systematically provide complete information on who owes taxes. Instead, it must rely on statistical sampling to first determine, of its inventory of assessments outstanding, which accounts are financial receivables and which are compliance assessments and then, for those accounts estimated to be financial receivables, how much is estimated to be collectible. For example, IRS estimated that the amount of receivables collectible at September 30, 1995 was approximately $46 billion, compared to $35 billion on September 30, 1994. IRS is un

5 In a compliance assessment, IRS proposes an assessment to encourage the taxpayer to comply with tax laws. The taxpayer still has the right to disagree or object. This type of assessment may result in a financial receivable if the taxpayer subsequently agrees to the assessment or tax court determines the amount is owed.

6 See Footnote 5.

able to determine which taxpayers accounted for the approximately 31-percent in

crease.

For fiscal year 1995, IRS developed a methodology to sort the inventory of its outstanding assessments into compliance assessments and financial receivables. We tested IRS' methodology and found that while the methodology appeared to be sound, the data upon which the analysis was based were flawed. Without reliable data, IRS cannot effectively measure the amount outstanding or determine how to manage its inventory of accounts receivable.

IRS could improve its ability to collect these amounts if it more promptly identified amounts owed by taxpayers. Enforcement tools, such as its matching programs and tax examinations, may not be used for up to 5 years from the point the tax return is due, thus reducing the likelihood that the outstanding amounts will be collected. If third-party documentation, such as the W-2, were compared to IRS taxpayer data more promptly, IRS might be able to reduce the risk of not being able to locate taxpayers or companies becoming defunct.

IRS collection efforts could also be improved with management information about its accounts receivable and enforcement efforts. Better management information would allow IRS to better allocate its resources to ensure the most benefit. Currently, IRS is implementing the Enforcement Revenue Information System, which was designed to account for actual collections resulting from IRS' enforcement efforts and to enable IRS to more accurately measure and predict enforcement costs and revenues. We are currently assessing the reliability of this system.

IRS' ability to collect more revenues from its accounts is hampered by the fact that IRS' financial receivables do not readily lend themselves to collection. Many unpaid assessments represent amounts clearly uncollectible, either because of the nature of the debt or because IRS has determined that it will not pursue collection because the taxpayer is unable to pay.

Question 8: What is your assessment of ERIS, the IRS Enforcement Revenue Information System? Can IRS accurately measure how much additional revenue is gained from enhanced compliance and revenue collection initiatives.

GAO Response: IRS has been developing the Enforcement Revenue Information System (ERIS) to account for actual collections resulting from IRS' enforcement efforts and to enable IRS to more accurately measure and predict enforcement costs and revenues. However, its implementation was delayed because of inaccuracies in the system's data. IRS has recently stated that initial problems have been resolved and the final phase of ERIS is scheduled for implementation in October 1996. We are currently reviewing the system to assess its reliability.

However, even though ERIS inaccuracies may have been resolved, the system may not be able to provide reliable results because of incomplete or inaccurate taxpayer data generated from its feeder systems, including the individual and business masterfiles. During our fiscal year 1994 financial statements audit, we found numerous errors in underlying data within the masterfiles. For fiscal year 1995, we were unable to determine if problems in underlying data from the masterfile had been resolved. Because IRS did not provide the data in a timely manner, we were unable to test detailed transactions from the masterfile. Although ERIS manipulates the data from these feeder systems, it is unable to update incorrect taxpayer data. These data issues will need to be further addressed if the ERIS system is to be successful.

In the past, ERIS was IRS' answer to tracking its revenue programs and compliance initiatives. Because of the potential inaccuracies with the ERIS system, IRS may not be able to reliably measure revenues realized from its Compliance Initiatives.

Questions 9: what effect will the lack of TSM security planning have on IRS's ability to monitor employee browsing? How can the IRS protect taxpayer data from unauthorized disclosure in the TSM environment of the future?

GAO Response: Until IRS completes a comprehensive security architecture with defined mechanisms and approaches to prevent, detect, and react to browsing, IRS cannot ensure that taxpayer data will be adequately protected. We are currently conducting a review of IRS security over taxpayer data at IRS computing and service centers. In addition, we are continuing to evaluate the extent to which taxpayer data will be protected in Cyberfile.

Senator GLENN. Thank you, Mr. Chairman.
Chairman STEVENS. Yes, sir.

Senator Pryor?

Senator PRYOR. Could I yield to Senator Levin?
Chairman STEVENS. Yes, sir.

23-595 97-3

Senator Levin?

OPENING STATEMENT OF SENATOR LEVIN Senator LEVIN. Thank you, Mr. Chairman. Thank you, Senator Pryor.

I would like to ask you some questions about your telephone service, your 800 line, both in terms of giving information and in responding to request for forms. Some of the statistics that the IRS has issued indicate a 98-percent figure for calls answered, and I am trying to find out how this jibes with what we understand the facts to be, which are that most of the people who try to reach that 800 number can't reach it.

Ms. RICHARDSON. I will be happy to get you some specific numbers. I don't know where a 98-percent number would have come from because I think

Senator LEVIN. Well, this is the way you folks keep track of calls. According to the GAO chart, they say here that the goal in 1995 is to answer 35 million calls and, in fact, you answered 39 million calls, and so you rate that as 110 percent of the scheduled calls. Is that true?

Ms. RICHARDSON. Well, you want to talk about the process, but we know that we are not answering anywhere near 98 percent of the calls. We would be delighted if we could.

Senator LEVIN. Well, I know you are not either.

Ms. RICHARDSON. But we have never laid claim to that.

Senator LEVIN. Well, what do you lay claim to? What percentage of the calls that you receive that people are making to try to reach you actually connect with you?

Mr. DOLAN. At this point in the year, across our telephone systems, it is running in the 50 percent range.

IRS RESPONSE TO SENATOR CARL LEVIN'S QUESTION

In the March 26, 1996, hearing before the U.S. Senate, Committee on Governmental Affairs, Senator Carl Levin asked a question on response rates for IRS telephone services. Commissioner Richardson agreed to provide specific figures on this topic for the record.

IRS Response: For Fiscal Year 1996, through March 16, the IRS answered 21,779,328 calls, which represents approximately 50 percent of the callers who tried to reach the IRS, and 115 percent of the scheduled 18,943,075 calls.

Senator LEVIN. Is this for forms or is this for information?

Mr. DOLAN. This is the information. The forms run a little higher. Senator, if I could come back to your 98 percent, though, one of the things that we have done is what we try to do each year. When you take our resource base, we want to allocate to the individual offices a plan that gets the absolute most productive use of that resource base, and that is where we get the estimates of what that resource should be able to buy by way of answered calls. We, at a minimum, want folks to meet that budget plan and, if possible, exceed it.

Senator LEVIN. Well, these are the figures I have got.

Ms. RICHARDSON. Senator Levin, just to elaborate on what Mr. Dolan said

Senator LEVIN. Well, I know your goal is to maximize your dollars. I am more interested in numbers. I am interested in how

many people try to reach you and how many people actually do, and this is the test that we have a record of that apparently the GAO made, and that is that 2,800 calls were made to your toll-free assistance number by the GAO and they succeeded in reaching an assister 250 times, which is only 9 percent.

Mr. DOLAN. Senator, this would be an area where, if you would like, there is a tremendous amount of data and insight to be brought to this question. One of the things we have tried to do in the last couple of years with the GAO is to get what we call a unique number calibration. It would allow us to identify the actual number of people trying to get into our places, and today we believe that to be about 50 to 55 percent during the filing season.

The other thing we have done, though, is we haven't played a pat hand. Last year we answered in excess of 110 million calls. What we have consciously sought to do is get as many of the calls that don't require the human intervention of an assister on the other end into a whole variety of forms of interaction so that we can continue to let that number go up in terms of customers whose needs are met.

Senator LEVIN. When you say that during the tax season you believe that 50 percent of the people trying to reach that 800 number actually reach it for information, what percentage of the people trying to reach it for forms during the tax season would get through? You said it was a larger percentage. Do you happen to know what that percentage is?

Mr. DONELSON. Right now, Senator, it is 51.2 percent.

Senator LEVIN. So it is about 50 percent, too.

Mr. DONELSON. Yes.

Senator LEVIN. Now, during the non-tax season, people trying to reach you for assistance-what would the percentage be, higher or lower?

Mr. DONELSON. Last year, Senator, the post-filing season where the questions get much more complicated because we are dealing with account questions as opposed to tax law questions-the lengths of the calls get longer, so that the access gets lower. It could drop another 10 percent after the filing season ends because, in effect, those calls are more difficult to answer and take longer to explain to the taxpayer why they owe money or why they have a problem with their account.

Senator LEVIN. OK, so that roughly, just to give us an idea of the problem here, maybe during the tax season half the people trying to reach you on the 800 number for assistance will get through, and during the non-tax season maybe 10 percent of the people trying to reach you will get through.

Mr. DONELSON. No, 10 percent less.

Senator LEVIN. Ten percent less, so it would be 40 percent during the non-tax season because the answers are longer. Now, that represents, obviously, a big-time problem. That is only problem No. 1. Half of the people trying to reach you for assistance can't get through to you. That is a big problem.

Problem No. 2 is the people who do reach you frequently wait a long, long time on the line for assistance. Do you know about what the average wait is for the folks who do reach the 800 number? Is