oversight

Tax Administration: IRS' Fiscal Year 1998 Budget Request

Published by the Government Accountability Office on 1997-06-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        United States General Accounting Office

GAO                     Testimony
                        Before the Subcommittee on Treasury and General
                        Government, Committee on Appropriations, U.S. Senate




For Release
on Delivery
Expected at
                        TAX ADMINISTRATION
9:30 a.m. EDT
Thursday,
June 19, 1997
                        IRS’ Fiscal Year 1998
                        Budget Request
                        Statement of James R. White, Associate Director, Tax
                        Policy and Administration Issues, General Government
                        Division




GAO/T-GGD/AIMD-97-130
Summary

Tax Administration: IRS’ Fiscal Year 1998
Budget Request

               IRS’ fiscal year 1998 budget request is for about $7.4 billion and 102,385
               full-time equivalent (FTE) staff compared to a proposed operating level in
               fiscal year 1997 of about $7.2 billion and 102,926 FTEs. IRS’ fiscal year 1998
               budget request includes $131 million for developmental information
               systems, the same amount that was provided in fiscal year 1997. The
               administration also is proposing a $1 billion capital account for IRS
               information technology investments. Neither the $131 million or the $1
               billion is supported by the kind of analysis required by Clinger-Cohen Act,
               the Results Act, and the Office of Management and Budget. Therefore,
               Congress should consider not funding both the $131 million request and
               the capital account until management and technical weaknesses in IRS’
               modernization program are resolved and required analyses are completed.

               The fiscal year 1998 budget request also includes $84 million for IRS’ turn
               of the century date change effort. IRS has already determined that it will
               need $61.2 million more for this effort in fiscal year 1997 than had been
               allocated. Given that and because IRS’ overall conversion needs are still
               being determined, it seems reasonable to question whether the amount
               requested for this effort in fiscal year 1998 will be sufficient.

               GAO  also has some concerns about certain fiscal year 1997 budget
               allocations. For example, IRS’ fiscal year 1997 appropriation mandated that
               a total of $26 million be provided for debt collection pilots. GAO’s review of
               the 1996 debt collection pilot identified various problems that impeded the
               pilot’s success. Until those problems are resolved, GAO believes that IRS and
               Treasury should be prohibited from spending the $26 million. Also, given
               that IRS has decided not to begin any new systems development projects
               until October 1998, GAO believes that Congress should consider rescinding
               $36 million that was designated for that purpose in fiscal year 1997. That
               amount represents the total allocated to systems development projects
               that IRS has cancelled for fiscal year 1997. By October 1998, IRS expects to
               have developed the internal capability to effectively manage systems
               development.

               Finally, IRS expects the funding limits it faces in fiscal year 1997 and
               anticipates for fiscal year 1998 to continue until at least 2002. Fiscal
               constraints as well as longstanding concerns about the efficiency of IRS
               operations make consensus on IRS’ strategic goals and the measures for
               assessing progress against those goals critically important. The provisions
               and requirements of the Chief Financial Officers Act, the Clinger-Cohen
               Act, and the Results Act provide a mechanism for accomplishing this.




               Page 1                                                  GAO/T-GGD/AIMD-97-130
Statement

Tax Administration: IRS’ Fiscal Year 1998
Budget Request

                  Mr. Chairman and Members of the Subcommittee:

                  We are pleased to be here today to participate in the Subcommittee’s
                  inquiry into the Internal Revenue Service’s (IRS) budget request for fiscal
                  year 1998. Our statement is based on a review of that budget request; a
                  review of steps taken by IRS in response to its fiscal year 1997
                  appropriation, including its spending plans for information systems; and
                  our past work on IRS’ operations and systems modernization efforts.

                  IRS’ fiscal year 1998 budget request is for about $7.4 billion and 102,385
                  full-time equivalent (FTE) staff compared to a proposed operating level in
                  fiscal year 1997 of about $7.2 billion and 102,926 FTEs. Appendix 1 provides
                  a more detailed comparison of fiscal years 1998 and 1997 along with data
                  showing how IRS’ appropriation has changed since fiscal year 1991.
                  Appendix II has trend information for several of IRS’ performance
                  indicators.

                  Our statement makes the following points:

              •   In response to congressional concerns and direction, IRS allocated about
                  1,000 additional FTEs to taxpayer service activities in fiscal year 1997 and
                  revised its fiscal year 1997 information systems spending plans. IRS has
                  since cancelled some of the projects that were included in those plans and
                  that it had estimated would cost a total of $36 million in fiscal year 1997.
              •   Our review of IRS’ private sector debt collection pilot program identified
                  significant barriers to the pilot’s success. Those problems should be
                  resolved before fiscal year 1997 funds earmarked for private sector debt
                  collection pilots are expended.
              •   IRS’ fiscal year 1998 budget request includes $131 million for
                  developmental information systems, the same amount that was provided
                  in fiscal year 1997. In addition to that basic request, the administration is
                  proposing a capital account for information technology investments at
                  IRS—$500 million for fiscal year 1998 and another $500 million for 1999.
                  Neither the $131 million or the $1 billion is supported by the type of
                  analysis required by the Clinger-Cohen Act, the Government Performance
                  and Results Act (otherwise known as the Results Act or GPRA), and Office
                  of Management and Budget (OMB) Circular No. A-11.
              •   The budget request also includes $84 million for IRS’ turn of the century
                  date change effort. IRS has already determined that it will need several
                  million dollars more for this effort in fiscal year 1997 than had been
                  allocated. Given that and because IRS’ overall conversion needs are still




                  Page 2                                                  GAO/T-GGD/AIMD-97-130
                           Statement
                           Tax Administration: IRS’ Fiscal Year 1998
                           Budget Request




                           being determined, it seems reasonable to question whether the amount
                           requested for this effort in fiscal year 1998 will be sufficient.
                       •   IRS is also requesting funds to replace two old systems used to process
                           paper returns and remittances. Because spending on this project has been
                           accelerated in fiscal year 1997, all of the funding being requested for 1998
                           may not be needed.
                       •   The largest staffing increase in IRS’ budget request is for 195 FTEs (with an
                           associated cost of $11 million) to process a projected increase in the
                           number of tax returns filed in 1998. IRS expects that most of the additional
                           returns will be filed electronically. Data IRS used to determine how much
                           more money and staff it needed to process those additional returns show
                           only a small difference between the number of FTEs needed to process a
                           million electronic returns and the number needed to process a million
                           paper returns. That small difference is inconsistent with what we would
                           have expected and may reflect, at least in part, the fact that electronic
                           filing is not truly paperless.
                       •   Finally, IRS and Congress face many challenges in moving the nation’s tax
                           system into the next millennium. Funding limits faced by IRS in fiscal year
                           1997 and anticipated for fiscal year 1998 are projected to continue until at
                           least 2002. Fiscal constraints as well as longstanding concerns about the
                           operations and management of IRS make consensus on IRS performance
                           goals and measuring progress in achieving those goals critically important.
                           The provisions and requirements of the Chief Financial Officers Act,
                           Clinger-Cohen Act, and Results Act provide a mechanism for
                           accomplishing this.


                           Before discussing the fiscal year 1998 budget request, it might be useful to
Overview of 1997           summarize some of the issues associated with IRS’ fiscal year 1997
Appropriation Issues       appropriation. The appropriation act1 and accompanying conference
                           report2 for fiscal year 1997 indicated that Congress was concerned about
                           various aspects of IRS’ operations. Among other things, Congress
                           expressed concern about (1) Tax Systems Modernization (TSM) and the
                           need to direct more systems development work to the private sector;
                           (2) TSM funds being directed at “feeding the beast” rather than at true
                           modernization; (3) the ability of taxpayers to reach IRS over the telephone;




                           1
                            The Omnibus Consolidated Appropriations Act (P.L. 104-208, Sept. 30, 1996).
                           2
                            H.R. Report No. 863, 104th Cong., 2d sess. (1996).



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                               Statement
                               Tax Administration: IRS’ Fiscal Year 1998
                               Budget Request




                               and (4) the need to maintain taxpayer service at fiscal year 1995 levels, at a
                               minimum.3

                               In response to its fiscal year 1997 appropriation and the congressional
                               direction specified therein, IRS, among other things, (1) revised its
                               spending plans for information systems and (2) reallocated resources
                               within the processing, assistance, and management account to direct more
                               FTEs to taxpayer service activities.


                               Another issue associated with IRS’ fiscal year 1997 appropriation involves
                               funding provided for private sector debt collection pilot programs. We
                               believe that spending on those programs should be prohibited until
                               various problems we identified have been resolved.


IRS’ Fiscal Year 1997          For fiscal year 1997, IRS was appropriated about $1.3 billion to fund its
Systems Spending Plans         information systems. The appropriation act specified that the $1.3 billion
Appear Consistent With         be spent as follows:
Congressional Direction,   •   $758.4 million for legacy systems,
but $36 Million May No     •   $206.2 million for TSM operational systems,
Longer Be Needed           •   $130.1 million for TSM development and deployment,
                           •   $83.4 million for program infrastructure,
                           •   $62.1 million for “stay-in-business” projects,
                           •   $61.0 million for staff downsizing, and
                           •   $21.9 million for telecommunication network conversion.

                               IRS’plans for spending its fiscal year 1997 information systems
                               appropriation and IRS’ obligations through December 31, 1996, appear
                               consistent with the act’s direction. Specifically, at the beginning of fiscal
                               year 1997, we judgmentally selected eight projects, totaling approximately
                               $197 million, that IRS planned to fund with its information systems
                               appropriation and analyzed each relative to the categories and amounts
                               specified in the act. Our analysis showed that IRS identified its projects in
                               accordance with the legislative categories and that all of the projects we
                               reviewed appeared to be consistent with the act’s categories and spending
                               levels.

                               In analyzing IRS’ spending, we found that IRS had 15 projects that were used
                               to justify the allocation of $130.1 million for systems development and


                               3
                                Congress added this requirement because it was concerned that IRS’ pending reorganization of
                               certain field activities would adversely affect taxpayer service.



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                        Statement
                        Tax Administration: IRS’ Fiscal Year 1998
                        Budget Request




                        deployment. Of the 15 projects, 9 (with fiscal year 1997 costs totaling
                        about $87.3 million) were ongoing or completed. IRS is reviewing one other
                        project that was used to justify $7 million and canceled the remaining five
                        projects, which had projected fiscal year 1997 costs totaling about
                        $36 million.

                        According to IRS’ Chief Information Officer (CIO), IRS canceled these
                        systems because business case analyses did not justify continued
                        development. The canceled projects include the Corporate Accounts
                        Processing System, the Integrated Case Processing System, and the
                        Workload Management System.

                        The CIO also stated that IRS will not start any new system development
                        projects until about October 1998, after it has developed the internal
                        capability needed to effectively manage such projects. Therefore,
                        Congress should consider rescinding the $36 million that IRS will not be
                        using for systems development and deployment in fiscal year 1997.

                        As noted earlier, $61 million of IRS’ fiscal year 1997 information systems
                        appropriation was allocated for staff downsizing. We question whether all
                        of the $61 million will be needed for that purpose. IRS had requested those
                        funds to downsize its information systems staff by 819 positions.
                        According to IRS’ Chief for Management and Administration, however,
                        attrition among information systems staff has been higher than expected
                        and IRS’ downsizing plans, as of March 3, 1997, included only 228
                        information systems positions.


Increased Resources     Given congressional concerns about the level of taxpayer service and the
Provided for Taxpayer   low level of telephone accessibility documented in several of our reports,4
                        IRS decided that its highest priority in 1997, other than processing returns
Service in 1997
                        and refunds, would be to improve taxpayer service, especially the ability
                        of taxpayers to reach IRS on the phone. One important step IRS took to
                        achieve that end was to increase the number of FTEs devoted to taxpayer
                        service. According to IRS estimates, the number of taxpayer service FTEs
                        will increase from 8,031 in fiscal year 1996 to 9,091 in fiscal year 1997. The
                        estimated number of FTEs for fiscal year 1997 is also higher than in fiscal
                        year 1995, which is in accord with congressional direction in IRS’ fiscal

                        4
                         Tax Administration: Continuing Problems Affect Otherwise Successful 1994 Filing Season
                        (GAO/GGD-95-5, Oct. 7, 1994); The 1995 Tax Filing Season: IRS Performance Indicators Provide
                        Incomplete Information About Some Problems (GAO/GGD-96-48, Dec. 29, 1995); and IRS’ 1996 Tax
                        Filing Season: Performance Goals Generally Met; Efforts to Modernize Had Mixed Results
                        (GAO/GGD-97-25, Dec. 18, 1996).



                        Page 5                                                               GAO/T-GGD/AIMD-97-130
                                 Statement
                                 Tax Administration: IRS’ Fiscal Year 1998
                                 Budget Request




                                 year 1997 appropriation. According to IRS budget officials, some of these
                                 additional FTEs were achieved by reallocating resources originally targeted
                                 for submission processing; the rest were funded with user fees that IRS is
                                 authorized to retain.

                                 The bulk of the staffing increase for taxpayer service is directed at helping
                                 taxpayers reach IRS by telephone. In addition to the increase in taxpayer
                                 service FTEs discussed above, IRS also detailed staff from other functions to
                                 help answer the phone, including staff who would normally be doing
                                 compliance work. This increased staffing, along with other steps IRS took,
                                 seems to have succeeded in significantly improving telephone accessibility
                                 during the 1997 tax return filing season. As discussed in more detail in
                                 appendix III, accessibility increased from 20.1 percent during the 1996
                                 filing season to 50.9 percent during the 1997 filing season.


Problems With IRS’ Private       As part of IRS’ fiscal year 1997 appropriation, Congress mandated that
Debt Collection Pilot            $13 million be made available to extend the private sector debt collection
                                 pilot program that was initiated in fiscal year 1996. An additional
                                 $13 million was earmarked for a second private debt collection pilot to be
                                 managed by the Department of the Treasury. To date, none of the
                                 $26 million has been obligated.

                                 At the request of the Chairman of the Oversight Subcommittee, House
                                 Committee on Ways and Means, we evaluated the initial pilot and found
                                 significant legal, systems and operations, and performance measurement
                                 barriers to the pilot’s success. Specifically we found that

                             •   IRS’legal interpretations prevented the pilot from being a true test of
                                 private contractors’ ability to collect delinquent taxes;
                             •   systems and operations problems made it difficult to identify, select, and
                                 transmit cases to the contractors; and
                             •   the pilot lacked appropriate performance measures to identify and capture
                                 the best practices and techniques used by private collectors.

                                 IRS    agreed with our findings.

                                 On the basis of our findings, the Chairmen of the Oversight Subcommittee;
                                 the Subcommittee on Treasury, Postal Service, and General Government,
                                 House Committee on Appropriations; and the Subcommittee on
                                 Government Management, Information, and Technology, House
                                 Committee on Government Reform and Oversight informed the Secretary



                                 Page 6                                                 GAO/T-GGD/AIMD-97-130
                            Statement
                            Tax Administration: IRS’ Fiscal Year 1998
                            Budget Request




                            of the Treasury that contracts should not be awarded at this time for the
                            Treasury-managed pilot.

                            Until the issues jeopardizing the success of the pilots are resolved, we
                            believe that IRS and Treasury should be prohibited from spending both the
                            $13 million to extend the ongoing IRS pilot and the $13 million earmarked
                            for the Treasury-managed private debt collection pilot.


                            IRS’ fiscal year 1998 budget request includes $1.27 billion and 7,162 FTEs for
Fiscal Year 1998            information systems. Of the $1.27 billion, $1.14 billion is for operational
Budget Request for          systems, including funds for IRS’ century data change effort and for
Information Systems         replacing two old processing systems. The rest of the request
                            ($131 million) is for developmental systems. In addition to the
Raises Several              $1.27 billion, the administration is requesting $1 billion over 2 years to
Questions                   fund a multi-year capital account, referred to as the Information
                            Technology Investments Account, for new modernization projects at IRS.

                            Our analysis of the information systems request raised several questions:
                            (1) Should Congress approve the $131 million for developmental systems
                            and the $1 billion capital account given the absence of the kind of
                            supporting analyses required by the Clinger-Cohen Act, the Results Act,
                            and OMB? (2) Is the money being requested for IRS’ century date conversion
                            effort sufficient? and (3) Will IRS need all of the money requested for
                            replacing two processing systems?


$131 Million Budget         The Clinger-Cohen Act, the Results Act, and OMB Circular No. A-11 and
Request for Systems         supporting memoranda require that information technology investments
Development Not Justified   be supported by accurate cost data and convincing cost-benefit analyses.
                            For fiscal year 1998, IRS is requesting $131 million for system development.
                            However, IRS’ request does not include a credible, verifiable justification.
                            According to IRS budget officials, $131 million was requested for fiscal year
                            1998 because it was approximately the same amount IRS received in fiscal
                            year 1997 for system development.

                            The budget request states that IRS does not know how it plans to spend the
                            $131 million because its modernization systems architecture and system
                            deployment plan have not yet been finalized. IRS publicly issued a draft
                            version of these documents on May 15, 1997, and provided them to private
                            industry for review and comment by July 15, 1997. Once finalized, these
                            documents are intended to guide future systems development.



                            Page 7                                                  GAO/T-GGD/AIMD-97-130
                              Statement
                              Tax Administration: IRS’ Fiscal Year 1998
                              Budget Request




No Justification to Support   The administration is proposing to establish an Information Technology
Billion Dollar Information    Investments Account to fund future modernization investments at IRS. It is
Technology Investments        seeking $1 billion—$500 million in fiscal year 1998 and another
                              $500 million in fiscal year 1999—for “yet-to-be-specified” development
Account                       efforts. According to IRS’ request, the funds are to support acquisition of
                              new information systems, expenditures from the account will be reviewed
                              and approved by Treasury’s Modernization Management Board (MMB), and
                              no funds will be obligated before July 1, 1998.

                              The Clinger-Cohen Act, the Results Act, and OMB Circular No. A-11 and
                              supporting memoranda require that, prior to requesting multi-year funding
                              for capital asset acquisitions, agencies develop accurate, complete cost
                              data and perform thorough analyses to justify the business need for the
                              investment. For example, agencies need to show that needed investments
                              (1) support a critical agency mission; (2) are justified by a life cycle based
                              cost-benefit analysis; and (3) have cost, schedule, and performance goals.

                              IRShas not prepared such analyses for its fiscal year 1998 and 1999
                              investment account request. Instead, IRS and Treasury officials stated that,
                              during executive-level discussions, they estimated that they would need
                              about $2 billion over the next 5 years. This estimate was not based on
                              analytical data or derived using formal cost estimating techniques.
                              According to OMB officials responsible for IRS’ budget submission, the
                              request was reduced to $1 billion over 2 years because they perceived the
                              lesser amount as more palatable to Congress. These officials also told us
                              that they were not concerned about the precision of the estimate because
                              their first priority is to “earmark funds” in the fiscal year 1998 and 1999
                              budgets so funds will be available when IRS eventually determines how it
                              wants to modernize its systems.


IRS and Treasury Are Still    In 1995 we made over a dozen recommendations to the Commissioner of
Addressing Modernization      Internal Revenue to address systems modernization management and
Weaknesses                    technical weaknesses.5 We reported in 1996 that IRS had initiated many
                              activities to improve its modernization efforts but had not yet fully
                              implemented any of our recommendations.6 Congress also took steps to
                              improve the modernization effort. Specifically, in the fiscal year 1997



                              5
                              Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If
                              Modernization Is to Succeed (GAO/AIMD-95-156, July 26, 1995).
                              6
                               Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management and
                              Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996).



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Statement
Tax Administration: IRS’ Fiscal Year 1998
Budget Request




Omnibus Appropriations Act7, Congress directed IRS to (1) submit by
December 1, 1996, a schedule for transferring a majority of its
modernization development and deployment to contractors by July 31,
1997, and (2) establish a schedule by February 1, 1997, for implementing
our recommendations by October 1, 1997. In its conference report on the
act, Congress directed the Secretary of the Treasury to (1) provide
quarterly reports on the status of IRS’ corrective actions and modernization
spending8 and (2) submit by May 15, 1997, a technical architecture for the
modernization that had been approved by the MMB. Additionally, the MMB
was directed to prepare a request for proposal by July 31, 1997, to acquire
a prime contractor to manage modernization deployment and
implementation.

IRS and Treasury have taken steps to address our recommendations and
respond to congressional direction. For example, in response to the 1997
appropriations act, IRS (1) provided a November 26, 1996, report to
Congress that set forth IRS’ strategic plan and schedule for shifting
modernization development and deployment to contractors and
(2) submitted to Congress a February 27, 1997, report on the timetable for
implementing our recommendations. For its part, Treasury (1) provided
corrective action and spending reports to Congress for the first quarter of
fiscal year 1997 and (2) submitted an MMB-approved architecture to
Congress on May 15, 1997, that the department and IRS have circulated to
private industry for review and comment. As part of this effort, Treasury
and IRS are also soliciting private industry input on prime contractor
management strategies.

To assess the effectiveness of IRS’ efforts to date, we are reviewing IRS’
(1) recently issued modernization architecture, (2) capability to acquire
software-intensive systems using contractors, and (3) information
technology investment management process. While the results of these
reviews are not yet known, it is important to reiterate what we have said
before—until IRS fully implements our recommendations, its systems
modernization will continue to be at risk.9


Given IRS’ poor track record delivering cost-beneficial TSM systems and the
lack of justification for proposed system expenditures, Congress should

7
 Public Law 104-208, September 30, 1996.
8
 H.R. Report No. 863, 104th Cong., 2d sess. (1996). Congress also required that Treasury provide a
schedule for developing and implementing all modernization projects in Treasury’s fiscal year 1996
appropriations act (Public Law 104-52, Nov. 19, 1995).
9
 GAO High-Risk Series, IRS Management (GAO/HR-97-8, Feb. 1997).


Page 9                                                                   GAO/T-GGD/AIMD-97-130
                                Statement
                                Tax Administration: IRS’ Fiscal Year 1998
                                Budget Request




                                consider not funding both the $131 million request for systems
                                development and the $1 billion capital account until the management and
                                technical weaknesses in IRS’ modernization program are resolved and the
                                required justifications are completed.


Funding Needs for Century       IRS, like other federal agencies, is in the midst of a major project aimed at
Date Change Are Uncertain       making its computer systems “century date compliant.” Because IRS’
                                systems, like many others in government and the private sector, use
                                two-digit date fields, they cannot distinguish, for example, between the
                                year 1900 and the year 2000 (the systems would show both years as “00”).
                                IRS estimates that the failure to correct this situation before 2000 could
                                result in millions of erroneous tax notices, refunds, and bills. Accordingly,
                                IRS’ CIO has designated this effort as a top priority. The CIO established a
                                year 2000 project office to coordinate work among the various IRS
                                organizations with responsibility for assessing, converting, and testing IRS
                                systems.

                                IRS’current plans are to spend $106.2 million on century date conversion
                                efforts in fiscal year 1997. This would exceed its fiscal year 1997 budget by
                                $61.2 million. Of this amount,

                            •   $47.7 million is for non labor costs ( e.g., the purchase of updated
                                operating system environments, contractor support for software
                                conversion and testing, and additional hardware for expected capacity
                                increases) and
                            •   $13.5 million is for additional labor costs, which is to come from IRS’
                                existing budget for overall information systems staffing.

                                To meet these needs, IRS is seeking approval to reprogram some fiscal year
                                1997 funds from other accounts and to use available “no-year” TSM funds.
                                In addition, the Chief Financial Officer’s organization is conducting an
                                IRS-wide review to identify other sources of funding should they be
                                needed.

                                IRS’fiscal year 1998 budget request includes another $84 million for the
                                century date change effort. It is uncertain, however, if this amount will be
                                sufficient to address IRS’ century date funding needs for fiscal year 1998.
                                The fiscal year 1998 request was based on September 1996 cost estimates
                                that, in turn, were based on an estimate of lines of computer code for IRS’
                                main tax processing systems. However, there are potentially significant
                                costs in other areas for which IRS has yet to complete initial assessments,



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                          Statement
                          Tax Administration: IRS’ Fiscal Year 1998
                          Budget Request




                          including (1) secondary tax processing systems that are also critical to the
                          tax administration process; (2) telecommunications; (3) commercial
                          off-the-shelf software; and (4) non-information technology resources, such
                          as elevators and heating and air conditioning units. IRS has efforts
                          underway to address each of these areas. For example, IRS recently formed
                          a committee of executives to address options for dealing with secondary
                          systems. By the end of June, the committee expects to have made
                          decisions on which of these systems will or will not be converted. IRS
                          officials said that they expect to have a complete cost estimate for
                          converting these systems by September 1997.


Replacement of Systems    Also as part of its information systems request, IRS is asking for $44 million
That Process Paper Tax    in fiscal year 1998 to continue developing replacements for two
Returns and Remittances   systems—the Distributed Input System (a 12-year old system used to
                          process paper returns) and the Remittance Processing System (an 18-year
                          old system used to process tax payments)—and to begin pilot testing in
                          January 1998. IRS reports that the systems are unreliable, costly to operate
                          and maintain, and not year 2000 compliant.

                          Project officials told us that to meet the January 1998 milestone for
                          piloting the new systems, an additional $6.1 million of fiscal year 1997
                          money has been reprogrammed to the Distributed Input
                          System/Remittance Processing System replacement project. Consequently,
                          the project will not need this $6.1 million in fiscal year 1998. Accordingly,
                          Congress should consider reducing the fiscal year 1998 request for this
                          project by $6.1 million.


                          IRS’ largest requested budget increase is for $214 million and 195 FTEs to
Request for Additional    maintain its fiscal year 1997 program levels in fiscal year 1998. According
Returns Processing        to IRS, most of the $214 million is needed to cover pay and benefits for the
Staff Raises Questions    employees it has on board. However, $11 million and all 195 FTEs are
                          intended to cover “mandatory workload increases” in its returns
About Benefits of         processing function. More specifically, IRS has projected that the number
Electronic Filing         of primary tax returns filed will increase from 197.9 million in 1997 to
                          200 million in 1998. IRS has also projected that 91 percent of the increase in
                          primary tax returns (or 1.9 million returns) will be filed electronically.

                          The data IRS used to determine its need for $11 million and 195 FTEs
                          indicated that IRS only saves about 5 FTEs for every 1 million returns that
                          are filed electronically. This is contrary to what we would have expected.



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                     Statement
                     Tax Administration: IRS’ Fiscal Year 1998
                     Budget Request




                     Because up-front filters keep certain taxpayer errors that are common on
                     paper returns from contaminating electronic returns and because
                     electronic returns bypass the labor intensive and error prone key punching
                     process IRS uses for paper returns, we would expect that the labor and
                     related costs to process electronically-filed returns would be substantially
                     lower than the labor and costs associated with processing paper returns.
                     According to IRS budget officials, IRS has an effort underway to determine
                     the comparative cost of processing electronic and paper tax returns. They
                     expect that study to be completed in September 1997.

                     At least part of the smaller-than-expected savings from electronic filing
                     can be attributed to the fact that electronic filing is not truly paperless.
                     Taxpayers filing electronically, other than through TeleFile, must submit a
                     paper signature document to authenticate the electronic portion of their
                     return. And IRS has to process that document. In January 1993, we reported
                     that to significantly increase the use of electronic filing IRS would have to
                     resolve various issues that adversely affect the appeal of electronic filing.10
                      One of those issues is the requirement to submit paper documents with an
                     electronic return.


                     As discussed earlier, IRS data indicate that taxpayers had a much better
Challenges for the   chance of reaching IRS by telephone during the 1997 filing season than they
Future               had in 1996. This improvement, however, was not without cost. IRS used
                     various strategies to improve accessibility, one of which involved detailing
                     staff from other functions, including staff who would otherwise be
                     auditing tax returns, to answer the phone. The funding limits and program
                     tradeoffs faced by IRS in fiscal year 1997 and anticipated for fiscal year
                     1998 are likely to continue for the foreseeable future. The administration’s
                     outyear projections actually reflect a decline in IRS funding when inflation
                     is considered.

                     At the same time, IRS is faced with competing demands and pressure from
                     external stakeholders, including Congress, to improve its operations and
                     resolve longstanding concerns. Modernization of IRS’ processes and
                     systems is critical to doing this. So is reaching consensus on IRS’ strategic
                     goals and performance measures.

                     In recent years, Congress has put in place a statutory framework for
                     addressing these challenges and helping Congress and the executive

                     10
                      Tax Administration: Opportunities to Increase the Use of Electronic Filing (GAO/GGD-93-40, Jan. 22,
                     1993).



                     Page 12                                                                 GAO/T-GGD/AIMD-97-130
Statement
Tax Administration: IRS’ Fiscal Year 1998
Budget Request




branch make the difficult trade-offs that the current budget environment
demands. This framework includes as its essential elements the Chief
Financial Officers Act; information technology reform legislation,
including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act;
and the Results Act, or GPRA.

In crafting these acts, Congress recognized that congressional and
executive branch decisionmaking had been severely handicapped by the
absence in many agencies of the basic underpinnings of well managed
organizations. We have found numerous examples across government of
management-related challenges stemming from unclear missions
accompanied by the lack of results-oriented performance goals, the
absence of detailed business strategies to meet those goals, and the failure
to gather and use accurate, reliable, and timely program performance and
cost information to measure progress in achieving results. All of these
problems exist at IRS. To effectively bridge the gap between IRS’ current
operations and its future vision while living within the budget constraints
of the federal government, these challenges must be met.

Under GPRA, every major federal agency must ask itself some basic
questions: What is our mission? What are our goals and how will we
achieve them? How can we measure performance? How will we use that
information to make improvements? GPRA forces a focus on results. GPRA
has the potential for adding greatly to IRS performance—a vital goal when
resources are limited and public demands are high.

GPRA  requires each agency to develop a strategic plan that lays out its
mission, long-term goals, and strategies for achieving those goals. The
strategic plans are to take into account the views of Congress and other
stakeholders. To ensure that these views are considered, GPRA requires
agencies to consult with Congress as they develop their strategic plans.

Congress and the administration have both demonstrated that they
recognize that successful consultations are key to the success of GPRA and
therefore to sustained improvements in federal management. For IRS, these
consultations provide an important opportunity for Congress, IRS, and
Treasury to work together to ensure that IRS’ mission is focused, goals are
specific and results oriented, and strategies and funding expectations are
appropriate and reasonable. The consultations may prove difficult because
they entail a different working relationship between agencies and
Congress than has generally prevailed in the past. The consultations are
likely to underscore the competing and conflicting goals of IRS programs,



Page 13                                                GAO/T-GGD/AIMD-97-130
    Statement
    Tax Administration: IRS’ Fiscal Year 1998
    Budget Request




    as well as the sometimes different expectations of the numerous parties
    involved.

    As a GPRA pilot agency, IRS should be ahead of many federal agencies in the
    strategic planning and performance measurement process. Nonetheless,
    IRS remains a long way from being able to ensure that its budget funds the
    programs that will contribute the most towards achieving its mission
    goals. While IRS needs more outcome-oriented indicators, it also has
    difficulty in measuring its performance with the indicators it has. For
    example, IRS’ top indicator is its Mission Effectiveness Indicator. This is
    calculated by subtracting from the revenue collected the cost of IRS
    programs and taxpayer burden and dividing that result by true total tax
    liability. While this approach may be conceptually sound, IRS does not have
    reliable data to calculate taxpayer burden nor can it calculate true total
    tax liability.


    In summary, there are several questions regarding IRS’ fiscal year 1997
    spending and IRS’ fiscal year 1998 budget request that the Subcommittee
    may wish to consider. Among these are:

•   Should the $36 million that IRS will not be using for systems development
    and deployment in fiscal year 1997 be rescinded?
•   Should IRS and Treasury be prohibited from spending the $26 million
    earmarked for two private debt collection pilot programs until issues
    jeopardizing their success are resolved?
•   What level of funding will IRS need to make its information systems
    century date compliant?
•   Does IRS need all of the fiscal year 1998 funding it is requesting for the
    Distributed Input System/Remittance Processing System replacement
    project?
•   What level of funding should Congress provide for developing new
    information systems, given the lack of any justification for the $131 million
    requested for fiscal year 1998 and the $1 billion investment account for
    fiscal years 1998 and 1999?
•   What reliable, outcome-oriented performance measures should be put in
    place to guide IRS and Congress in deciding how many resources should be
    given to IRS and how best to allocate those resources among IRS’ functional
    activities?

    That concludes my statement. We welcome any questions that you may
    have.



    Page 14                                                GAO/T-GGD/AIMD-97-130
Page 15   GAO/T-GGD/AIMD-97-130
Appendix I

Comparison of Fiscal Year 1998 Budget
Request With Prior Years

                                       Tables I.1 and I.2, respectively, show how IRS’ fiscal year 1998 budget
                                       request compares to (1) its proposed fiscal year 1997 operating level and
                                       (2) its appropriations since fiscal year 1991.

Table I.1: Comparison of IRS’ Fiscal
Year 1998 Budget Request With          Dollars in thousands
Proposed Fiscal Year 1997 Operating                                             Fiscal year 1997            Fiscal year 1998
Level
                                       Budget activity                           Dollars           FTEs      Dollars           FTEs
                                       Submission Processing                   $788,138       15,481       $820,325       15,694
                                       Telephone & Correspondence               786,616       20,815        815,382       20,815
                                       Document Matching                         67,298            1,904     69,783            1,904
                                       Inspection                               100,581            1,214    103,874            1,214
                                       Management Services                      534,808            7,275    559,355            7,352
                                       Rent & Utilities                         604,416             169     574,455             169
                                       Subtotal: Processing,                  2,881,857       46,858       2,943,174      47,148
                                       Assistance, and
                                       Management Appropriation
                                       Criminal Investigation                   371,780            4,595    385,081            4,595
                                       Examination                            1,586,545       25,910       1,641,834      25,916
                                       Collection                               715,552       12,387        751,918       12,387
                                       Employee Plans and Exempt                128,116            2,117    132,696            2,117
                                       Organizations
                                       Statistics of Income                      23,756             471      24,781             471
                                       Chief Counsel                            210,469            2,589    217,412            2,589
                                       Subtotal: Tax Law                      3,036,218       48,069       3,153,722      48,075
                                       Enforcement Appropriation
                                       Operational Information                1,156,408            7,708   1,141,596           6,912
                                       Systems
                                       Developmental Information                130,131             291     130,891             250
                                       Systems
                                       Subtotal: Information
                                       Systems Appropriation                  1,286,539            7,999   1,272,487           7,162
                                       Grand Total                            7,204,614      102,926       7,369,383     102,385
                                       Source: IRS’ budget estimates for fiscal year 1998.



                                       We did not extend the above comparison to fiscal years before 1997
                                       because IRS restructured its budget for fiscal year 1998 and adjusted only
                                       its fiscal year 1997 figures to coincide with that new structure. One major
                                       restructuring involved what used to be the “Taxpayer Services” budget
                                       activity. That activity, which is part of IRS’ Processing, Assistance, and
                                       Management appropriation, was renamed “Telephone and




                                       Page 16                                                             GAO/T-GGD/AIMD-97-130
                                       Appendix I
                                       Comparison of Fiscal Year 1998 Budget
                                       Request With Prior Years




                                       Correspondence” and was revised to combine various assistance programs
                                       with compliance activities conducted by phone and correspondence.
                                       Other restructuring included (1) a consolidation of what were four
                                       different resources management budget activities into a single
                                       Management Services activity, (2) creation of a separate budget activity
                                       for rent and utilities, and (3) the consolidation of what were four
                                       information systems budget activities into two—one for operational
                                       systems and one for developmental systems.

Table I.2: Comparison of IRS’ Fiscal
Year 1998 Budget Request With IRS      Dollars in billions
Appropriations for Fiscal Years 1991                                             Appropriation in 1997
Through 1997                           Fiscal year                                             dollars                       Total FTEs
                                       1991                                                        7,088                         115,628
                                       1992                                                        7,513                         116,673
                                       1993                                                        7,792                         113,460
                                       1994                                                        7.710                         110,665
                                       1995                                                        7,826                         112,069
                                       1996                                                        7,397                         106,642
                                       1997                                                        7,205                         102,926
                                                                                                         a
                                       1998                                                        7,182                         102,385b
                                       a
                                       Requested amount.
                                       b
                                           Estimate based on requested amount.

                                       Source: IRS’ budget requests for fiscal years 1993 through 1998. Dollars are presented in 1997
                                       constant dollars on the basis of GAO computations using budget request data and Gross
                                       Domestic Product Deflator.




                                       Page 17                                                                GAO/T-GGD/AIMD-97-130
Appendix II

Trends for Certain IRS Performance
Indicators

                                          The following tables and figure show trends for various IRS performance
                                          indicators

Table II.1: Number of Individual Income
Tax Returns Filed                         In millions
                                                                                                 Number of individual
                                          Fiscal year                                             income tax returns
                                          1991                                                                 114.1
                                          1992                                                                 115.0
                                          1993                                                                 114.2
                                          1994                                                                 113.4
                                          1995                                                                 116.3
                                          1996                                                                 118.8
                                          Source: IRS annual reports and data books.



Table II.2: Information Returns
Received                                  In millions
                                                                                               Number of information
                                          Fiscal year                                                         returns
                                          1991                                                                 1,042
                                          1992                                                                 1,035
                                          1993                                                                 1,040
                                          1994                                                                 1,052
                                          1995                                                                 1,054
                                          1996                                                                 1,070
                                          Source: IRS annual reports and data books.




                                          Page 18                                              GAO/T-GGD/AIMD-97-130
                                           Appendix II
                                           Trends for Certain IRS Performance
                                           Indicators




Figure II.1: Telephone Accessibility
Rates                                      100      Percent

                                               90

                                               80

                                               70

                                               60
                                                                                                              51
                                               50
                                                    40
                                               40
                                                              33
                                               30
                                                                        24
                                                                                  21                 20
                                               20

                                               10                                         8


                                                0

                                                     1991      1992      1993      1994       1995    1996     1997
                                                     Filing season



                                           Note: Telephone accessibility is computed by dividing the total number of calls answered by the
                                           total number of call attempts, which we define as the sum of (1) calls answered, (2) busy signals,
                                           and (3) calls abandoned by the caller before an IRS assistor got on the line.

                                           Source: IRS’ Management Information System for Top Level Executives and IRS’ Telephone Data
                                           Reports.


Table II.3: Audit Coverage of Individual
and Corporate Income Tax Returns                                      Individual income tax returns           Corporate income tax returns
                                                                         Number of               Percent           Number of              Percent
                                           Fiscal year                      audits              coverage              audits             coverage
                                           1991                              1,313,168                1.17            67,618                 2.52
                                           1992                              1,206,019                1.06            79,597                 3.04
                                           1993                              1,058,966                0.92            79,873                 3.05
                                           1994                              1,225,707                1.08            58,110                 2.31
                                           1995                              1,919,437                1.67a           51,808                 2.05
                                           1996                              1,941,546                1.67            59,832                 2.34
                                           a
                                            IRS attributes the increase in 1995 to auditors pursuing nonfiler cases and the increasing
                                           number of Earned Income Credit claims reviewed by service center examination staff.

                                           Note: Audit coverage is the number of returns examined divided by the number of returns filed in
                                           the previous calendar year.

                                           Source: IRS data books.




                                           Page 19                                                                    GAO/T-GGD/AIMD-97-130
                                         Appendix II
                                         Trends for Certain IRS Performance
                                         Indicators




Table II.4: Delinquent Tax Collections
by IRS                                   Dollars in billions
                                         Fiscal year                                    Current dollars                     1996 dollars
                                         1991                                                        24.3                          27.5
                                         1992                                                        24.2                          26.6
                                         1993                                                        22.8                          24.4
                                         1994                                                        23.5                          24.5
                                         1995                                                        25.1                          25.7
                                         1996                                                        29.8                          29.8
                                         Source: Current dollars from IRS annual reports and data books. 1996 dollars are GAO
                                         computations using IRS data and gross domestic product indexes.




                                         Page 20                                                               GAO/T-GGD/AIMD-97-130
Appendix III

Telephone Accessibility


                                     During each filing season, millions of taxpayers call IRS with questions
                                     about the tax law, their refunds, or their account. According to IRS data, as
                                     shown in table III.1, the accessibility of IRS’ telephone assistance, as we
                                     have defined it in the past, has increased substantially.11

Table III.1: Accessibility of IRS’
Telephone Assistancea                                                   Number of call           Number of calls
                                                                              attempts                 answered                     Percent
                                     Filing season                        (in millions)             (in millions)               accessibility
                                     1997                                            62.4                       31.8                       50.9
                                     1996                                           114.0                       22.9                       20.1
                                     a
                                      These data are for January 1 through April 19, 1997, and January 1 through April 20, 1996.

                                     Source: IRS data.



                                     As table III.1 indicates, the increase in accessibility is due to a combination
                                     of more calls being answered and fewer calls coming in. IRS’ ability to
                                     answer more calls is due, at least in part, to (1) an increase in the number
                                     of staff assigned to answer the phone, some of which was achieved by
                                     detailing staff from other IRS functions,12 and (2) revisions to IRS’
                                     procedures for handling calls.

                                     As an example of the latter, this year, unlike past years, callers who
                                     indicated, through the choices they selected on the automated telephone
                                     menu, that they had a question in a complex tax area (such as “sale of
                                     residence”) were to be connected to a voice messaging system. Those
                                     callers were asked to leave their name, telephone number, and best time
                                     for IRS to call back, and they were told that someone would be calling back
                                     within 2 working days. Those return calls were to be made by staff
                                     detailed from IRS’ Examination function. According to IRS, it made this
                                     change after a study showed that several areas of complicated tax law
                                     involved 20 to 30 minute telephone conversations and that an assistor
                                     could answer about 5 simpler calls within the same amount of time.

                                     The decline in the number of calls coming in can be attributed, in no small
                                     part, to IRS’ ability to answer more calls. The more successful IRS is in


                                     11
                                       Accessibility, as we have traditionally defined it, is the total number of calls answered divided by the
                                     number of call attempts, which is the sum of the following: (1) calls answered, (2) busy signals, and
                                     (3) calls abandoned by the caller before an IRS assistor got on the line.
                                     12
                                      In one service center, for example, 26 staff from the Collection area were detailed on an as-needed
                                     basis to answer the phones, 45 staff from that center’s Adjustment/Correspondence Branch were
                                     detailed to answer phone calls during the filing season, and another 24 staff from that Branch were
                                     detailed to answer calls for 2 hours each afternoon.



                                     Page 21                                                                      GAO/T-GGD/AIMD-97-130
           Appendix III
           Telephone Accessibility




           answering the phone, the fewer times taxpayers should have to call in an
           attempt to get through. Another factor cited by IRS as a contributor to the
           number of call attempts was the elimination of certain notices that it
           deemed to be unnecessary, which, in turn, reduced the need for persons to
           call IRS with questions about those notices.




(268810)   Page 22                                               GAO/T-GGD/AIMD-97-130
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