oversight

Tax Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season, and Fiscal Year 1998 Budget Request

Published by the Government Accountability Office on 1997-03-18.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Oversight, Committee on
                          Ways and Means, House of Representatives




For Release
on Delivery
Expected at
                          TAX ADMINISTRATION
11:00 a.m. EST
Tuesday, March 18, 1997

                          IRS’ Fiscal Year 1997
                          Spending, 1997 Filing
                          Season, and Fiscal Year
                          1998 Budget Request
                          Statement of Lynda D. Willis, Director, Tax Policy and
                          Administration Issues, General Government Division




GAO/T-GGD/AIMD-97-66
Summary

Tax Administration: IRS’ Fiscal Year 1997
Spending, 1997 Filing Season, and Fiscal
Year 1998 Budget Request
               IRS’fiscal year 1997 appropriation act and accompanying conference
               report indicated that Congress was concerned about, among other things,
               the level of taxpayer service and IRS’ lack of progress in modernizing its
               systems.

               In response to congressional concerns about taxpayer service, IRS added
               more staff this year to answer the telephone and revised its procedures for
               handling more complicated calls for assistance. As a result, IRS answered
               52 percent of taxpayers’ call attempts during the first 2 months of this
               filing season, compared with 21 percent during the same period last year.
               This filing season has also seen a large increase in electronic filing.

               To respond to congressional concerns about modernization, IRS realigned
               its fiscal year 1997 information system spending plans. GAO’s review of
               eight projects showed that the spending plans appeared to be consistent
               with congressional direction. However, IRS (1) has since cancelled projects
               that it had estimated would cost a total of $36 million in fiscal year 1997
               and (2) decided not to begin acquiring and developing new systems for
               another 12 to 18 months. Therefore, Congress should consider rescinding
               the $36 million.

               Included in IRS’ budget request for fiscal year 1998 is $131 million for
               developmental information systems. In addition, the administration is
               proposing a $1 billion capital account for information technology
               investments at IRS. Neither the $131 million or the $1 billion is supported
               by the type of analysis required by Clinger-Cohen Act, the Government
               Performance and Results Act, and the Office of Management and Budget.
               Congress should consider not funding either the $131 million request or
               the capital account until management and technical weaknesses in IRS’
               modernization program are resolved and required justifications are
               completed. IRS’ budget request also includes $84 million for its turn of the
               century date conversion effort. There is reason to question the sufficiency
               of that amount because IRS has not yet determined its total conversion
               needs.

               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. In recent years,
               Congress has put in place a statutory framework for accomplishing this.
               This framework includes as its essential elements the Chief Financial



               Page 1                                                  GAO/T-GGD/AIMD-97-66
Summary
Tax Administration: IRS’ Fiscal Year 1997
Spending, 1997 Filing Season, and Fiscal
Year 1998 Budget Request




Officers Act; the Clinger-Cohen Act; and the Government Performance and
Results Act.




Page 2                                              GAO/T-GGD/AIMD-97-66
Statement

Tax Administration: IRS’ Fiscal Year 1997
Spending, 1997 Filing Season, and Fiscal
Year 1998 Budget Request
                  Madam 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) actions to implement its
                  fiscal year 1997 appropriation, the status of the 1997 tax return filing
                  season, and the administration’s fiscal year 1998 budget request for IRS.

                  This statement is based on our review of the administration’s fiscal year
                  1998 budget request, the interim results of our review of the 1997 tax
                  return filing season, a review of IRS’ fiscal year 1997 spending plans for
                  information systems, and our past work on Tax Systems Modernization
                  (TSM).

                  Our statement makes the following points:

              •   IRS’ fiscal year 1997 appropriation act and accompanying conference
                  report indicated that Congress was concerned about, among other things,
                  the level of taxpayer service and the lack of progress in implementing TSM.
                  In response to congressional concerns and direction, IRS allocated about
                  1,000 additional full-time equivalent (FTE) staff to taxpayer service
                  activities and realigned its fiscal year 1997 information system 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.
              •   The 1997 filing season has seen significant increases in two areas where
                  we have criticized IRS’ performance in the past—electronic filing and
                  telephone accessibility. To help achieve those increases, IRS (1) revised the
                  tax package sent to persons eligible to file by telephone, hoping, as a
                  result, to encourage them to file by phone; (2) assigned more staff to
                  answer the phone; and (3) revised its procedures for handling more
                  complicated telephone requests for assistance.
              •   IRS’ basic budget request for fiscal year 1998 is for $7.4 billion and 102,385
                  FTEs. Included in that request is $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 (GPRA), and the Office of Management and Budget (OMB).
              •   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



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                           Statement
                           Tax Administration: IRS’ Fiscal Year 1997
                           Spending, 1997 Filing Season, and Fiscal
                           Year 1998 Budget Request




                           million dollars 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.
                       •   IRS is also requesting funds to replace two old systems used to process
                           paper returns and remittances. Because extra money is being spent on
                           those replacement systems in 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 Government Performance and Results Act provide
                           a mechanism for accomplishing this.


                           IRS’ fiscal year 1997 appropriation act1 and accompanying conference
Overview of 1997           report2 indicated that Congress was concerned about various aspects of
Appropriation Issues       IRS’ operations. Among other things, Congress expressed concern about
                           (1) 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; (4) the need to maintain taxpayer service at fiscal year 1995




                           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 1997
                                           Spending, 1997 Filing Season, and Fiscal
                                           Year 1998 Budget Request




                                           levels, at a minimum;3 and (5) the need to develop a strategic plan and
                                           performance measures for inclusion in IRS’ fiscal year 1998 budget request.

                                           As shown in table 1, IRS’ final appropriation for fiscal year 1997 was $7.2
                                           billion—$142 million less than its fiscal year 1996 appropriation. The fiscal
                                           year 1997 appropriation also rescinded about $174 million in information
                                           systems funds. Table 1 also shows that the fiscal year 1997 appropriation
                                           provided (1) all of what IRS requested for processing, assistance, and
                                           management; (2) $424 million less than requested for tax law enforcement;
                                           and (3) $365 million less than requested for information systems.

Table 1: IRS’ Fiscal Year 1997
Appropriation Compared to Its Fiscal       In billions
Year 1997 Budget Request and Fiscal                                                  Fiscal year 1996 Fiscal year 1997 Fiscal year 1997
Year 1996 Appropriation                    Appropriation account                        appropriation budget request      appropriation
                                           Processing, assistance, and
                                           management                                         $1.724              $1.780                 $1.780
                                           Tax law enforcement                                 4.097               4.528                   4.104
                                           Information
                                           systems                                             1.527               1.688                   1.323
                                           Totala                                             $7.348              $7.995                 $7.206
                                           a
                                               Totals may not add due to rounding.

                                           Source: P.L. 104-52, fiscal year 1997 President’s budget request for IRS, and P.L. 104-208.



                                           In response to its fiscal year 1997 appropriation and the congressional
                                           direction specified therein, IRS (1) revised its spending plans for
                                           information systems; (2) reallocated resources within the processing,
                                           assistance, and management account to direct more resources to taxpayer
                                           service activities; and (3) reduced the number of compliance staff.


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
Are 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,

                                           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 1997
    Spending, 1997 Filing Season, and Fiscal
    Year 1998 Budget Request




•   $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 also found that IRS has ongoing or completed
    over one-half of the projects (with fiscal year 1997 costs totaling about
    $87.3 million) that were used to justify the allocation of $130.1 million for
    systems development and deployment. IRS is reviewing one other project
    for $7 million and has canceled the remaining 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 does not plan to start any new system
    development projects until it has developed the internal capability needed
    to effectively manage system development projects, which includes
    developing a modernization systems architecture and a systems
    deployment plan. The CIO said that it would be 12 to 18 months before IRS
    begins acquiring and developing new systems. 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



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                           Statement
                           Tax Administration: IRS’ Fiscal Year 1997
                           Spending, 1997 Filing Season, and Fiscal
                           Year 1998 Budget Request




                           and IRS’ current downsizing plans include 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 our annual filing
Service in 1997            season reports,4 IRS decided that its highest priority in 1997, other than
                           processing returns 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 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. To augment that increase, IRS has also
                           been detailing staff from other functions to help answer the phone,
                           including staff who would normally be doing compliance work. As
                           discussed later, this increased staffing, along with other steps IRS took,
                           seem to have succeeded in significantly improving telephone accessibility
                           this filing season.


IRS Reduced Compliance     The fiscal year 1997 appropriation for tax law enforcement was essentially
Staff in 1997 to           a roll-over of the 1996 appropriation. However, IRS, in its budget request
Accommodate Roll-Over of   for 1997, said that it needed an increase of $116 million just to “maintain
                           current levels” for enforcement. According to IRS, getting a roll-over in
1996 Funding               funding for 1997 rather than an increase forced it to reduce staffing levels
                           for compliance activities so it could pay on-board staff. Specifically, IRS
                           reduced certain compliance positions (i.e., revenue agents and revenue
                           officers) by more than 1,000. As one result of this reduction, IRS estimates
                           that audit coverage will drop from 1.6 percent to 1.2 percent. We should
                           note, however, that these reductions were directed at those enforcement

                           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).



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                                         Statement
                                         Tax Administration: IRS’ Fiscal Year 1997
                                         Spending, 1997 Filing Season, and Fiscal
                                         Year 1998 Budget Request




                                         staff that IRS has characterized as “representing the least efficient use of IRS
                                         resources on the margin.”


                                         By various statistical measures traditionally used to assess a filing season,
The 1997 Filing                          the 1997 filing season is going well. Especially noteworthy are significant
Season                                   increases in electronic filing and telephone accessibility. One major
                                         change this year involves a new procedure IRS is using to deal with returns
                                         that have missing or incorrect Social Security Numbers (SSN). However,
                                         the impact of this procedure will not be evident until after the filing
                                         season. Another area that we cannot address at this time is refund fraud.
                                         IRS had not compiled data on the number of fraudulent returns and refunds
                                         identified this year as of the time we prepared this testimony.


Significant Increases in                 As of March 7, 1997, the number of returns filed electronically, including
Electronic Filing and                    those filed over the telephone, was 24.7 percent more than at the same
Telephone Accessibility                  time last year. This increase is even more significant considering, as
                                         shown in table 2, that the total number of individual income tax returns
                                         filed as of March 7, 1997, was 1.5 percent less than at the same time last
                                         year.

Table 2: Individual Income Tax Returns
Received                                 Type of filing                         March 7, 1997          March 8, 1996        Percent of change
                                         Traditional
                                         paper                                      28,057,000             31,980,000                         –12.3
                                                    a
                                         1040PC                                       2,746,000              2,373,000                         15.7
                                         Total Paper                                30,803,000             34,353,000                         –10.3
                                         Traditional electronicb                    10,921,000               9,273,000                         17.8
                                         TeleFile                                     3,495,000              2,284,000                         53.0
                                         Total Electronic                           14,416,000             11,557,000                          24.7
                                         Total                                      45,219,000             45,910,000                          –1.5
                                         a
                                          Under the Form 1040PC method of filing, taxpayers or tax return preparers use personal
                                         computer software that produces paper tax returns in answer-sheet format. The Form 1040PC
                                         shows the tax return line and the data on that line. Only lines on which the taxpayer has made an
                                         entry are included on the Form 1040PC.
                                         b
                                          Traditional electronic returns are those that are filed through third parties, such as tax return
                                         preparers.

                                         Source: IRS’ Management Information System for Top Level Executives.




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                                 Statement
                                 Tax Administration: IRS’ Fiscal Year 1997
                                 Spending, 1997 Filing Season, and Fiscal
                                 Year 1998 Budget Request




                                 As table 2 shows, the largest percentage increase is in the number of
                                 returns filed by telephone (i.e., TeleFile). That increase may be due, in
                                 large part, to a change in the tax package IRS sent eligible TeleFile users
                                 this year. In past years, IRS sent taxpayers who appeared eligible to use
                                 TeleFile a package that included not only TeleFile materials but also a
                                 Form 1040EZ and related instructions. Thus, taxpayers who could not or
                                 did not want to use TeleFile had the materials they needed to file on paper,
                                 assuming they were still eligible to file a Form 1040EZ. This year, IRS
                                 eliminated the Form 1040EZ and related instructions from the package
                                 sent eligible TeleFile users—hoping that more taxpayers would be inclined
                                 to use TeleFile if they only received the TeleFile materials.

                                 A second noteworthy trend this year is an increase in the ability of
                                 taxpayers who have questions about the tax law, their refunds, or their
                                 account to reach IRS by telephone. As shown in table 3, the accessibility of
                                 IRS’ telephone assistance, as we have defined it in the past, has increased
                                 substantially.5

Table 3: Accessibility of IRS’
Telephone Assistancea                                                  Number of call           Number of calls
                                                                             attempts                 answered                  Percent
                                 Filing season                           (in millions)             (in millions)            accessibility
                                 1997                                               21.6                       11.3                   52.3
                                 1996                                               42.3                         9.0                  21.3
                                 a
                                  These data are for January 1 through February 22, 1997, and January 1 through February 24,
                                 1996.

                                 Source: IRS data.



                                 As table 3 indicates, the increase in accessibility is due to a combination of
                                 fewer calls coming in and more calls being answered. The two factors are
                                 not unrelated. The more successful IRS is in answering the phone, the
                                 fewer times taxpayers should have to call in an attempt to get through.

                                 IRS has another way of measuring accessibility, called “level of access”,
                                 which tracks the percentage of callers who were eventually able to get
                                 through to IRS rather than the number of call attempts. As of February 22,
                                 1997, according to IRS data, the level of access was 71 percent, a
                                 substantial increase over the 52-percent level of access as of the same time
                                 last year.

                                 5
                                  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.



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                            Statement
                            Tax Administration: IRS’ Fiscal Year 1997
                            Spending, 1997 Filing Season, and Fiscal
                            Year 1998 Budget Request




                            There are several factors that appear to have contributed to IRS’ increased
                            telephone service: (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;6 (2) an attempt to reduce the need for persons to call
                            IRS by eliminating certain notices that IRS deemed to be unnecessary; and
                            (3) revisions to IRS’ procedures for handling calls.

                            As an example of the latter, this year, unlike past years, callers who
                            indicate, through the choices they select on the automated telephone
                            menu, that they have a question in a complex tax area (such as “sale of
                            residence”) are to be connected to a voice messaging system. Those
                            callers are asked to leave their name, telephone number, and best time for
                            IRS to call back, and they are told that someone will be calling back within
                            2 working days. Those return calls are being 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.


Too Soon to Assess Impact   One important change this filing season involves the way IRS is handling
of IRS’ New SSN             returns filed with missing or incorrect SSNs. Over the last few years, when
                            IRS identified a missing or invalid SSN, it delayed the taxpayer’s refund and
Procedure
                            corresponded with the taxpayer to resolve the issue. As we noted in our
                            report to the Subcommittee on the 1996 filing season, IRS was unable to
                            pursue many of the problem SSNs it identified under those procedures.7

                            Effective with this filing season, IRS was given the legislative authority to
                            treat missing or invalid SSNs as an error made by the taxpayer, similar to
                            the way IRS handles math errors. Under that new authority, when IRS
                            detects a missing or invalid SSN, it is to disallow any related deductions and
                            credits and adjust the taxpayer’s tax liability.

                            For example, if a taxpayer claims one dependent and the child care credit,
                            but lists an invalid SSN for the dependent, IRS is to increase the taxable
                            income by the personal exemption amount claimed for the dependent and
                            not allow the child care credit. IRS is then to adjust the taxpayer’s tax

                            6
                             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 have been
                            detailed to answer phone calls during the filing season, and another 24 staff from that Branch have
                            been detailed to answer calls for 2 hours each afternoon.
                            7
                            IRS’ 1996 Tax Filing Season: Performance Goals Generally Met; Efforts to Modernize Had Mixed
                            Results (GAO/GGD-97-25, Dec. 18, 1996).



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                            Statement
                            Tax Administration: IRS’ Fiscal Year 1997
                            Spending, 1997 Filing Season, and Fiscal
                            Year 1998 Budget Request




                            liability and reduce the taxpayer’s refund, if any. The taxpayer is to receive
                            a notice explaining the changes to his or her tax liability and refund. The
                            standard notice IRS is using provides a special toll-free telephone number
                            that taxpayers can call if they want to discuss the changes and/or provide
                            corrected information to support their claims. Taxpayers can also write to
                            IRS to resolve the issue.


                            IRSestimated that about 2.4 million taxpayers will receive these “SSN-math
                            error” notices in 1997. According to an IRS official, IRS had issued about
                            70,000 such notices as of February 21, 1997. At the time we prepared this
                            testimony, officials at three IRS customer service centers, which are
                            responsible for answering taxpayers’ inquiries, told us that assistors were
                            not yet getting many calls or letters from taxpayers who received the
                            notices. Thus, it is too early to assess the impact of this new procedure.


Data Not Yet Available on   As we noted in our report on the 1996 filing season, IRS identified many
Refund Fraud                fewer fraudulent returns last year than it did in 1995. According to IRS, the
                            decline was due to a 31-percent staffing decrease in IRS’ Questionable
                            Refund Program. Program officials told us that the reduced level of
                            staffing has continued in 1997. However, we do not know how the reduced
                            staffing has affected the number of fraudulent returns and refunds
                            identified this year because IRS had not compiled that data as of the time
                            we prepared this testimony.


                            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, GPRA, 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?



                            Page 11                                                  GAO/T-GGD/AIMD-97-66
                              Statement
                              Tax Administration: IRS’ Fiscal Year 1997
                              Spending, 1997 Filing Season, and Fiscal
                              Year 1998 Budget Request




Budget Request for            The Clinger-Cohen Act, GPRA, and OMB Circular No. A-11 and supporting
Systems Development Not       memoranda require that information technology investments be supported
Justified                     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. The budget
                              request states that IRS does not know how it plans to spend these funds
                              because its modernization systems architecture and system deployment
                              plan have not yet been finalized. These efforts are scheduled for
                              completion in May 1997 and are intended to guide future systems
                              development. 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.


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, and no
                              funds will be obligated before July 1, 1998.

                              The Clinger-Cohen Act, GPRA, 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




                              Page 12                                                 GAO/T-GGD/AIMD-97-66
                            Statement
                            Tax Administration: IRS’ Fiscal Year 1997
                            Spending, 1997 Filing Season, and Fiscal
                            Year 1998 Budget Request




                            budgets so funds will be available when IRS eventually determines how it
                            wants to modernize its systems.

                            In 1995 we made over a dozen recommendations to the Commissioner of
                            Internal Revenue to address systems modernization management and
                            technical weaknesses.8 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.9 Since then, IRS has continued
                            to address our recommendations and respond to congressional direction.
                            But, there is still no evidence that any of the recommendations have been
                            fully implemented and, as we reported in February 1997, IRS’ systems
                            modernization effort continues to be at risk.10 Much remains to be done to
                            implement essential improvements in IRS’ modernization efforts. IRS has
                            not yet instituted disciplined processes for designing and developing new
                            systems and has not yet completed its systems architecture.


                            Given IRS’ poor track record delivering cost-beneficial TSM systems,
                            persisting weaknesses in both software development and acquisition
                            capabilities, and the lack of justification and analyses for proposed system
                            expenditures, Congress should consider not funding either the
                            $131 million request for systems development or 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.” Currently, IRS’
                            computer systems can not distinguish between the years 1900 and 2000
                            because the systems year is represented by two-digit date fields (i.e., 00 in
                            both cases). 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.

                            8
                            Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If
                            Modernization Is to Succeed (GAO/AIMD-95-156, July 26, 1995).
                            9
                             Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management and
                            Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996).
                            10
                                GAO High-Risk Series, IRS Management (GAO/HR-97-8, Feb. 1997).



                            Page 13                                                              GAO/T-GGD/AIMD-97-66
                          Statement
                          Tax Administration: IRS’ Fiscal Year 1997
                          Spending, 1997 Filing Season, and Fiscal
                          Year 1998 Budget Request




                          IRS’fiscal year 1998 budget request includes $84 million for the century
                          date change effort, an increase of $39 million over the $45 million included
                          for that effort in IRS’ fiscal year 1997 budget. However, 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. The request did not include estimates for IRS’
                          secondary tax processing systems that are also critical to the tax
                          administration process. It also did not factor in many other activities
                          related to the century date change effort that have since been identified,
                          such as the need for additional hardware and software for testing,
                          operating system upgrades, and possibly additional storage capacity due
                          to expanded date fields.

                          Thus far in fiscal year 1997, IRS has identified requirements for the century
                          date conversion that would exceed its fiscal year 1997 budget by as much
                          as $49.5 million. Of this amount, $13.5 million is for additional labor costs
                          and the remaining $36 million is for nonlabor costs (i.e., the purchase of
                          updated operating system environments, contractor support for software
                          conversion and testing, and additional hardware for expected capacity
                          increases). IRS’ Investment Review Board recently approved a request for
                          these additional funds. However, according to IRS budget officials, a
                          funding source has not been identified. Once that source is identified, they
                          said they plan to notify the Appropriations Committees.

                          IRS is currently assessing what it needs to do to make its main tax
                          processing systems century date compliant and what that will cost.
                          However, there are other potentially significant project costs, including
                          those associated with converting and testing secondary tax processing
                          systems. IRS project officials told us that they hope to have a complete cost
                          estimate for the century date conversion effort by this summer. In the
                          meantime, given the status of IRS’ needs assessment, it seems reasonable
                          to question whether the amount requested for this effort in fiscal year 1998
                          will be sufficient.


Replacement of Systems    Also as part of its information systems request, IRS is asking for a
That Process Paper Tax    $35 million increase over the $9 million it received in fiscal year 1997 to
Returns and Remittances   replace two 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). IRS reports that the
                          systems are unreliable, costly to operate and maintain, and not year 2000




                          Page 14                                                  GAO/T-GGD/AIMD-97-66
                         Statement
                         Tax Administration: IRS’ Fiscal Year 1997
                         Spending, 1997 Filing Season, and Fiscal
                         Year 1998 Budget Request




                         compliant. IRS is requesting $44 million for fiscal year 1998 to develop a
                         replacement for these two systems and begin pilot testing in January 1998.

                         Project officials told us that to meet the January 1998 milestone for
                         piloting the new systems, they accelerated the project schedule. As a
                         result, they requested and the Investment Review Board approved, on
                         March 4, 1997, an additional $11.8 million—$5.7 million for fiscal year 1997
                         requirements and $6.1 million for fiscal year 1998 requirements.
                         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.
                         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.

                         Part of the explanation for the smaller-than-expected savings is 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 IRS needs to resolve
                         various issues that adversely affect the appeal of electronic filing.11 One of



                         11
                          Tax Administration: Opportunities to Increase the Use of Electronic Filing (GAO/GGD-93-40, Jan. 22,
                         1993).



                         Page 15                                                                   GAO/T-GGD/AIMD-97-66
                     Statement
                     Tax Administration: IRS’ Fiscal Year 1997
                     Spending, 1997 Filing Season, and Fiscal
                     Year 1998 Budget Request




                     those issues is the need to submit paper documents with an electronic
                     return.


                     Probably the most noteworthy part of IRS’ performance during the 1997
Challenges for the   filing season to date is the dramatic increase in telephone accessibility.
Future               The improvement, however, is not without cost. IRS is using various
                     strategies to improve accessibility, one of which involves detailing staff
                     from other functions 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
                     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 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. Our work has 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.




                     Page 16                                                  GAO/T-GGD/AIMD-97-66
Statement
Tax Administration: IRS’ Fiscal Year 1997
Spending, 1997 Filing Season, and Fiscal
Year 1998 Budget Request




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,
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.




Page 17                                                GAO/T-GGD/AIMD-97-66
               Statement
               Tax Administration: IRS’ Fiscal Year 1997
               Spending, 1997 Filing Season, and Fiscal
               Year 1998 Budget Request




               In summary, IRS’ 1997 filing season is going very well in two areas that we
               have criticized in the past. Telephone accessibility is much higher and
               more taxpayers are filing electronically.

               Regarding IRS’ fiscal year 1997 spending and IRS’ fiscal year 1998 budget
               request, there are several questions that Congress may wish to consider as
               it continues its oversight and appropriations activities. Among these are:

           •   Should the $36 million that IRS will not be using for systems development
               and deployment in fiscal year 1997 be rescinded?
           •   What level of funding will IRS need to make its information systems
               century date compliant, and will those changes be made in time?
           •   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.




(268780)       Page 18                                                 GAO/T-GGD/AIMD-97-66
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