oversight

Internal Revenue Service: Assessment of Fiscal Year 2004 Budget Request and 2003 Filing Season Performance to Date

Published by the Government Accountability Office on 2003-04-08.

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 9 a.m. EDT
Tuesday, April 8, 2003
                          INTERNAL REVENUE
                          SERVICE
                          Assessment of Fiscal Year
                          2004 Budget Request and
                          2003 Filing Season
                          Performance to Date
                          Statement of James R. White
                          Director, Tax Issues


                          Robert F. Dacey
                          Director, Information Technology Systems Issues




GAO-03-641T
                          a
                                               April 8, 2003


                                               INTERNAL REVENUE SERVICE

                                               Assessment of Fiscal Year 2004 Budget
Highlights of GAO-03-641T, a testimony
before the Subcommittee on Oversight,          Request and 2003 Filing Season
Committee on Ways and Means, House of
Representatives                                Performance to Date


The Internal Revenue Service (IRS)             IRS is requesting $10.4 billion and 100,043 FTEs, a dollar increase of about 5
is responsible for collecting most             percent over the fiscal year 2003 request. The 2004 budget request, like
of the funds that pay for the federal          other recent requests, identifies compliance as one of IRS’s top priorities for
government. For 2003, IRS expects              additional resources. As shown below, IRS intends to fund some program
to process 130 million individual              enhancements from the requested budget increase and internal savings.
income tax returns, issue 99 million
refunds, receive 100 million
                                               Several factors, including lowered savings projections since the budget
telephone calls, and assist 4 million          request was prepared, raise questions about IRS’s ability to achieve all the
taxpayers face-to-face at IRS and              savings and shift resources to compliance as planned. IRS’s recent history
volunteer offices. Most of these               raises the same questions, in part, because unbudgeted expenses, such as
interactions with taxpayers occur              pay raises, have absorbed budget increases.
during the January through April
tax filing season.                             IRS is requesting $2.1 billion in information technology. This includes $429
                                               million for the agency’s multiyear capital account that funds contractor costs
GAO was asked by the                           for the Business Systems Modernization program, and $1.67 billion for
Subcommittee to assess the                     information systems, primarily for operations and maintenance. In response
likelihood of IRS allocating more              to GAO’s recommendation last year, IRS has begun to implement an
resources to a key priority,                   information technology management process patterned after its systems
compliance; whether proposed
                                               modernization program. Until the process is fully implemented, IRS will have
spending on computer systems is
justified; and filing season                   limited ability to develop supportable information systems budget requests.
performance.
                                               IRS’s 2003 filing season performance has improved over last year. For
                                               example, IRS’s telephone access has improved and the Web site has seen
                                               increased use. Such improvements represent a payoff from IRS’s ongoing
                                               systems modernization investments and wider management improvements.
GAO is not making any
recommendations. However, as
                                               Although IRS has not succeeded in reallocating staff to one of its priority
GAO noted last year, until IRS
incorporates best practices in                 needs, compliance, there will likely be increased potential for such
preparing its information systems              reallocation as modernization proceeds. This will present Congress, in its
budget, it will not be able to ensure          oversight and appropriations roles, with significant opportunities to weigh in
that the information system                    on IRS’s overall strategy for better accomplishing its mission.
operations and maintenance
request is adequately supported.               IRS’s Proposed Funding for Program Enhancements

                                                                               $10.4 billion budget request
                                                        $10 billion for current operations

                                                                                                  $166 million from
                                                                                                                       $ 454 million
                                                                                                   internal savings
                                                                                                                       in proposed
                                                                                                                         program
                                                                                                    $288 million      enhancements
                                                                                                    from budget
                                                                                                      increase
www.gao.gov/cgi-bin/getrpt?GAO-03-641T.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Jim White at     Source: IRS data.
(202) 512-9110 or WhiteJ@gao.gov.
Mr. Chairman and Members of the Subcommittee:

We are pleased to participate in the Subcommittee’s inquiry into Internal
Revenue Service’s (IRS) fiscal year 2004 budget request and 2003 tax filing
season performance.

With its mission to “provide America’s taxpayers with top quality service by
helping them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all,” IRS is responsible
for collecting most of the funds that pay for the federal government. To
carry out its mission, IRS has a budget of about $10 billion and staff of
about 100,000 full time equivalents (FTE). For 2003, IRS expects to process
130 million individual income tax returns, issue 99 million refunds, receive
100 million telephone calls, and assist 4 million taxpayers face-to-face at
IRS and volunteer1 offices.

As you requested, our statement discusses both IRS’s 2004 budget request
and its 2003 filing season performance. With respect to the budget, we
assessed the likelihood that IRS will be able to allocate more resources to
one of its key priorities, compliance, and whether the proposed spending
on some computer systems is justified. With respect to the filing season, we
assessed IRS’s performance in processing returns and providing assistance
to taxpayers.

Our assessment of the budget request is based on a comparative analysis of
IRS’s fiscal year 2003 and 2004 budget requests, supporting documentation,
and interviews with IRS officials. Our assessment of the filing season is
based on a comparison of IRS’s performance this year to last, site visits to
IRS processing centers and walk-in sites, and interviews with IRS and
Treasury Inspector General for Tax Administration (TIGTA) officials, tax
preparers, and other external stakeholders. We also reviewed IRS’s Web
site for usability and accessibility.

In summary, our assessment of IRS’s 2004 budget request shows that:

• IRS is requesting 100,043 FTEs and $10.4 billion, an increase of about 5
  percent over its fiscal year 2003 request. The 2004 budget request is one
  of many that have identified compliance activities as among IRS’s top


1
These offices use IRS-trained volunteers to help prepare basic tax returns for taxpayers
with special needs.




Page 1                                                                        GAO-03-641T
   priorities for receiving additional resources. These additional resources
   were to be funded from budget increases, internally generated savings,
   or both. Savings projections have been revised downward since the 2004
   budget request was prepared, which raises questions about IRS’s ability
   to achieve all the savings and shift resources to compliance as planned.
   Further, IRS’s recent history shows that it has been unable to increase
   resources in compliance, despite having made it a priority in budget
   requests. In fact, for the most recent three full fiscal years—2000, 2001
   and 2002—compliance resources have declined slightly. Reasons for this
   include unfunded expenses consuming budget increases.

• Another priority area for IRS is Information Technology (IT). IRS is
  requesting about $2.1 billion and 7,986 staff years in information
  technology resources for fiscal year 2004. This includes (1) $429 million
  for the agency’s multiyear capital account that funds contractor costs
  for the BSM program and (2) about $1.67 billion and 7,735 staff years for
  information systems, of which $1.62 billion is for operations and
  maintenance. In preparing its fiscal year 2004 budget request for the
  operations and maintenance of information systems, IRS began to
  implement an information technology portfolio management process
  patterned after the one used for the BSM program. However, until IRS
  fully implements planned process improvements, its ability to develop
  supportable information systems budget requests will remain limited.

Our assessment of the 2003 filing season to date shows that:

• IRS’s 2003 filing season performance has improved over last year, based
  on the data we reviewed in key filing season activities—paper and
  electronic processing, telephone assistance, IRS’s Web site, and walk-in
  assistance. In particular, access to IRS’s telephone assistors has
  improved and Web site usage has increased. While we cannot quantify
  the connection between these results and IRS’s ongoing systems
  modernization efforts, the improvement in filing season performance, in
  part, represents a payoff from systems modernization.




Page 2                                                           GAO-03-641T
IRS’s Fiscal Year 2004   For fiscal year 2004, IRS is requesting $10.4 billion, an increase of 5.3
                         percent over fiscal year 2003 requested levels, and 100,043 FTEs. IRS’s 2004
Budget Request           budget request is its second in a row to propose increased spending for
Includes Compliance,     higher priority areas that would be funded, in part, with internal savings
                         redirected from other areas. Specifically, IRS proposes to devote an
Taxpayer Service, and    additional $454 million and 3,033 more FTEs to enhance programs,
Information Systems as   primarily in compliance and some customer service areas. As shown in
Priorities               figure 1, $166 million of the enhancements would be funded from internal
                         savings with the remainder funded from the budget increase.



                         Figure 1: IRS’s Proposed Funding for Program Enhancements
                                                       $10.4 billion budget request
                            $10 billion for current operations



                                                                          $166 million
                                                                          from internal   $ 454 million
                                                                          savings         in proposed
                                                                                          program
                                                                           $288 million   enhancements
                                                                           from budget
                                                                           increase



                          Source: IRS data
                          .



                         As we did in last year’s testimony on IRS’s 2003 budget request, we
                         commend IRS for identifying savings to be reinvested in operations to
                         improve IRS performance. This approach implements a key principal of
                         IRS’s long-term modernization effort. Under this approach, the
                         reengineering of IRS’s work processes—much of which is dependent on
                         investments in computer modernization—would automate or eliminate
                         work, improve productivity, and free staff time that could then be
                         redirected to higher priority customer service and compliance activities.

                         We provide some context for understanding the 2004 budget request in
                         figures 2 and 3 as shown in appendix I. In those figures, we illustrate how
                         IRS allocated expenditures and staff resources in fiscal year 2002, the most
                         recently completed year.



                         Page 3                                                              GAO-03-641T
Current Projections and        Revised projections developed since the 2004 budget request was prepared
Recent History Raise           raise questions about IRS’s ability to achieve all the savings projected and
                               shift resources to compliance as planned. In addition, some projected
Questions about Whether        savings are based on reengineering efforts that are not well defined.
IRS Will Realize Some          Further, IRS’s recent history also shows that it has been unable to increase
Priority Resource              resources in the compliance area despite having made it a priority in past
Reallocations                  budget requests. In fact, for the most recent 3 full fiscal years—2000, 2001,
                               and 2002—compliance resources have declined slightly. Reasons for this
                               decline include unfunded expenses consuming budget increases and
                               workload increases in other essential operations.

IRS Has Revised Some Savings   IRS has revised the savings associated with several reengineering efforts
Shown in Its 2004 Budget       identified in the 2004 budget request. Revisions this far in advance of the
Request                        start of the fiscal year are not a surprise. They do indicate that there is
                               some uncertainty associated with the budget request’s savings projections.

                               Four of the seven most significant reengineering efforts—in terms of FTEs
                               and dollars to be saved—will not achieve all of their projected savings
                               because the efforts were based on assumptions that will not be realized,
                               according to IRS data and officials. IRS now projects that the seven most
                               significant efforts will save 1,073 FTEs and $60.5 million, down from
                               original projections of 1,356 FTEs and $77.7 million.

                               IRS provided different reasons for why all savings will not be achieved for
                               the following individual efforts:

                               • IRS’s effort to improve the efficiency of compliance support activities—
                                 the single most significant effort—was partially dependent on IRS
                                 implementing individual compliance savings projects in 2003. This effort
                                 was projected to save 394 FTEs and almost $26 million. However, due in
                                 part to delays until 2004 to allow for additional testing, this effort is now
                                 expected to save about 30 percent of the original projections through
                                 the end of fiscal year 2004.

                               • IRS’s effort to improve the efficiency of personnel services—the second
                                 most significant effort—depended in part on the functions of a new
                                 computer system to achieve most of its savings. This effort was
                                 originally projected to save 222 FTEs and $14.6 million. According to
                                 IRS officials, these functions will not be delivered on time due to
                                 schedule delays. IRS officials have not determined the impact of this




                               Page 4                                                             GAO-03-641T
                                     delay and are currently assessing other potential approaches to achieve
                                     savings in this area.

                                  IRS officials said the remaining three of the seven most significant efforts
                                  will achieve all or more of their projected savings. For example, the effort
                                  to improve the efficiency of handling payments and returns, originally
                                  projected to save 121 FTEs and $4.6 million, is now expected to have more
                                  than double the savings, or 235 FTEs and $11.9 million, due to greater than
                                  expected productivity. However, according to IRS officials, even when their
                                  savings are combined, these three efforts will not save enough to offset the
                                  reduced savings from the other four.

                                  Reengineering efforts may not achieve all of their savings goals, in part,
                                  because of the long time lag between when IRS begins developing its
                                  budget request and when the fiscal year begins. As with most other federal
                                  agencies, IRS usually begins formulating its budget request about 18
                                  months before the start of the fiscal year and about 10 months before the
                                  President submits his budget to Congress. With planning beginning so far
                                  ahead of the budget’s actual execution, there are inevitably intervening
                                  events, such as implementation delays with computer systems, that make
                                  the assumptions upon which projections are based no longer realistic.

Some 2004 Reengineering Efforts   Some of the reengineering efforts listed in the 2004 budget request are not
Are Not Well Defined              well defined, thus raising questions about whether they will achieve their
                                  savings goals. For example:

                                  • IRS still is reviewing its procedures to identify ways to make tax return
                                    processing more efficient. Although IRS projected this effort to save 203
                                    FTEs and $6.9 million, it has not yet identified the operational areas that
                                    will be reengineered. IRS officials said that the projected savings are
                                    based on a 2 percent efficiency increase, but they are currently
                                    determining how to achieve that goal.

                                  • The effort to improve the efficiency of personnel services noted above
                                    also included numerous competitive outsourcing assessments affecting
                                    several program areas that, according to the budget request, would
                                    result in a significant reduction of staffing. However, in response to our
                                    request for more information, IRS was unable to provide details on the
                                    type or number of specific assessments, program areas that would be
                                    affected, how this effort would lead to reduced staffing, or the amount
                                    of net savings expected.




                                  Page 5                                                            GAO-03-641T
                                According to IRS budget officials, IRS uses its budget formulation process
                                to establish productivity goals, although the responsible business units may
                                not know specifically how savings will be achieved. Officials said that this
                                approach encourages innovation in meeting performance goals while
                                identifying ways to save FTEs and budget dollars.

In Recent Years, Compliance     Since 2001, IRS’s budget requests have made increasing compliance staff
Staffing Declined               one of several key priorities. For example, in its 2001 budget request IRS
                                asked for funding for the Staffing Tax Administration for Balance and
                                Equity (STABLE) initiative, which was designed to provide additional
                                staffing for examination, collections, and the new Tax Exempt and
                                Government Entities Division. However, TIGTA recently reported data that
                                showed an over 7 percent decline in compliance staff between 2000 and
                                2002.2

                                There are several reasons for the decline, including increased workload
                                and unfunded costs. In September 2002, the Commissioner attributed the
                                decline in compliance staffing to increases in workload in other essential
                                operations such as processing returns, issuing refunds, and answering
                                taxpayer mail. In the most recently completed fiscal year, 2002, IRS faced
                                unbudgeted cost increases, such as rent and pay increases, in the amount
                                of about $106 million. As a result, IRS had to delay hiring revenue agents
                                and officers, tax compliance officers, and tax specialists. As shown in
                                appendix I, in 2002 figure 2 shows about 69 percent of IRS’s spending was
                                for labor costs. IRS noted in its budget request that any major negative
                                changes in the agency’s financial posture, such as unfunded salary
                                increases, will have a negative effect on staffing levels.

IRS’s Experience in 2003        IRS’s experience with last year’s budget request illustrates the difficulty of
Illustrates the Difficulty of   projecting and realizing savings and investing resources in higher priority
Projecting Savings and          areas. As part of its 2003 budget request, IRS identified internal savings of
Investments                     almost $197 million and 2,287 FTEs to be accomplished through various
                                reengineering efforts and workload decreases. IRS planned to reinvest
                                those savings in higher priority areas—compliance and customer service
                                program enhancements, including efforts to stabilize audit rates, improve
                                telephone assistance level of service, and target highest priority collection
                                cases. However, IRS now estimates that about $75 million, or 38 percent, of


                                2
                                 Treasury Inspector General for Tax Administration, Trends in Compliance Activities
                                through Fiscal Year 2002, Reference No. 2003-30-078, Washington D.C.: March 2002. The
                                compliance staff figures include revenue officers, revenue agents, and tax auditors.




                                Page 6                                                                     GAO-03-641T
                         the dollar savings and about 1,280, or 56 percent, of the FTE savings will be
                         achieved by the specific reengineering efforts and workload decreases as
                         identified in the 2003 budget request. IRS officials provided several reasons
                         why some savings for these particular reengineering efforts will not be
                         realized, including delays in modernization projects and less-than-
                         anticipated workload decreases. For example, IRS received more innocent
                         spouse cases than anticipated, and the cases received were more complex,
                         causing the hours spent per case to increase.

                         While savings associated with a particular effort listed in the 2003 budget
                         request may not materialize, IRS officials said that business unit managers
                         have identified other ways to increase productivity and did more work with
                         fewer staff—therefore achieving productivity increases through efforts not
                         identified in the 2003 budget request. As an example, officials provided an
                         analysis showing increased telephone collections cases closed with
                         significantly fewer staff than in the previous year. While GAO did not verify
                         these savings, IRS officials were confident that this and other similar
                         productivity increases were being achieved. Furthermore, IRS budget
                         officials said the results of productivity increases not listed in the 2003
                         budget request should be included in any tally of IRS’s savings.

                         We agreed that productivity increases generate savings. IRS was unable to
                         quantify the gains from productivity increases in time for this hearing. IRS
                         officials also said that most of the savings generated by the productivity
                         increases would be used to handle workload increases in the same area
                         where savings were generated. They said the savings would not be
                         available for reallocation to other areas.

                         As was the case in 2002, cost increases not included in the 2003 budget
                         request are also limiting IRS’s ability to fund new investments. According to
                         IRS officials, IRS will need to fund a total of about $388 million out of
                         existing resources, including about $128 million for pay increases.



Information Technology   IRS is requesting about $2.1 billion and 7,986 staff years in information
Budget Formulation       technology (IT) resources for fiscal year 2004. This includes (1) $429
                         million for the agency’s multiyear capital account that funds contractor
Process Still Needs
                         costs for the BSM program and (2) about $1.67 billion and 7,735 staff years
Improvement              for information systems, of which $1.62 billion is for operations and
                         maintenance. In preparing its fiscal year 2004 budget request for the
                         operations and maintenance of information systems, IRS began to
                         implement an information technology portfolio management process



                         Page 7                                                            GAO-03-641T
                               patterned after the one used for the BSM program. However, until IRS fully
                               implements planned process improvements, its ability to develop
                               supportable information systems budget requests will remain limited.

Fiscal Year 2004 BSM Request   Consistent with the Clinger-Cohen Act of 1996,3 the Government
Developed in Accordance with   Performance and Results Act of 1993,4 OMB guidance on budget
Federal Guidance               preparation and submission5 require that, before requesting multiyear
                               funding for capital asset acquisitions, agencies develop sufficient
                               justification for these investments. This justification should reasonably
                               demonstrate how proposed investments support agency missions and
                               operations, and provide positive business value in terms of expected costs,
                               benefits, and risks.

                               Since the BSM appropriation was established in fiscal year 1998, we
                               recommended6 that IRS put in place an enterprise architecture
                               (modernization blueprint) to guide and constrain its business system
                               investments.7 Use of such a blueprint is a practice of leading public and
                               private sector organizations. Simply stated, this architecture provides a
                               high-level road map for business and technological change from which
                               agencies can logically and justifiably derive their budget requests and
                               capital investment plans. In response to our recommendations, IRS
                               developed an enterprise architecture. In March 2002, IRS approved a new
                               version of this architecture (version 2.0), which describes IRS’s current and
                               target business and technology environments. In December 2002, IRS
                               completed the associated high-level transition strategy that identifies and

                               3
                                P.L. 104-106.
                               4
                                P.L. 103-62.
                               5
                               See, for example, OMB Circular No. A-11: Preparing, Submitting, and Executing the
                               Budget (Washington, D.C.: June 27, 2002).
                               6
                                See U.S. General Accounting Office, Tax Administration: IRS’ Fiscal Year 1997 Spending,
                               1997 Filing Season, and Fiscal Year 1998 Budget Request, GAO-T-GGD/AIMD-97-66
                               (Washington, D.C.: Mar. 18, 1997); Tax Systems Modernization: Blueprint is a Good Start
                               But Not Yet Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54
                               (Washington, D.C.: Feb. 24, 1998); and Tax Administration: IRS’ 2000 Tax Filing Season
                               and Fiscal Year 2001 Budget Request, GAO/T-GGD/AIMD-00-133 (Washington, D.C.:
                               Mar. 28, 2000).
                               7
                                An enterprise architecture provides an institutional “blueprint” for defining how an
                               organization operates today (baseline environment) in both business and technological
                               terms, and how it wants to operate in the future (target environment). It also includes a
                               sequencing plan that provides a road map for transitioning between these environments.




                               Page 8                                                                         GAO-03-641T
                                 conceptually justifies needed investments to guide the agency’s transition
                                 over many years from its current to its target architectural state.

                                 IRS’s $429 million request for the BSM account for fiscal year 2004 is based
                                 on its enterprise architecture as well as its related life cycle methodology
                                 and investment management process. Thus, this request is based on
                                 analyses that meet the statutory and regulatory requirements for requesting
                                 multiyear capital investment funding.

BSM Program Management           Pursuant to statute,8 funds from the BSM account are not available for
Capability Improved, but Risks   obligation until IRS submits to the congressional appropriations
Remain                           committees for approval an expenditure plan that meets certain
                                 conditions.9 In November 2002, IRS submitted an expenditure plan seeking
                                 approval to obligate funds from the BSM account for its planned fiscal year
                                 2003 projects and program-level initiatives. In March 2003, IRS submitted a
                                 revised plan that reduced the initial request by shifting funding for two
                                 BSM projects to the information systems account and reducing the amount
                                 requested for the core infrastructure projects and program-level initiatives.

                                 In briefings to the staff of the relevant appropriations subcommittees and
                                 IRS on the results of our review of IRS’s November 2002 expenditure plan,
                                 we reported that IRS has progressed significantly in improving its
                                 modernization management controls and capabilities, and has taken steps
                                 to better balance the pace of the BSM program with its management
                                 capability. We also reported that, although important progress has been
                                 made, certain management controls and capabilities, related to
                                 configuration management, human capital management, and cost and
                                 schedule estimate validation, have not yet been fully implemented. Our
                                 analysis has shown that weaknesses in these controls and capabilities
                                 contributed to BSM project cost, schedule, and performance shortfalls
                                 during fiscal year 2002. In approving the release of a portion of the fiscal
                                 year 2003 BSM funding, the appropriations subcommittees directed IRS to,
                                 among other things, fully establish and implement all management
                                 processes and controls needed to effectively manage the BSM program.


                                 8
                                  Consolidated Appropriations Resolution, 2003 (P.L.108-7).
                                 9
                                   IRS’s BSM expenditure plans are required to (1) meet OMB capital planning and investment
                                 control review requirements, (2) comply with IRS’s enterprise architecture, (3) conform
                                 with IRS’s enterprise life cycle methodology, (4) be approved by IRS, Treasury, and OMB,
                                 (5) be reviewed by GAO, and (6) comply with the acquisition rules, requirements, guidelines,
                                 and systems acquisition management practices of the federal government.




                                 Page 9                                                                         GAO-03-641T
                                IRS has acknowledged these weaknesses and has initiatives planned or
                                under way to address them.

                                Despite the progress made during the past year, IRS’s BSM program faces
                                heightened risks because (1) several key projects are entering their later
                                stages of development and deployment, (2) some of these projects provide
                                the foundational infrastructure upon which later projects depend, (3) an
                                increasing number of project milestones are experiencing cost increases
                                and schedule delays, and (4) IRS plans to start more projects. While IRS is
                                better prepared to manage risk and meet the challenges ahead, sustained
                                top management involvement, improved management capabilities, and
                                consistent oversight, are critical to the successful implementation of the
                                BSM program.

Although Progress Made,         Leading private- and public-sector organizations have taken a project- or
Information Systems Budget      system-centric approach to managing not only new investments but also
Request Development Process     the operations and maintenance of existing systems. As such, these
Needs Additional Improvements   organizations

                                • identify operations and maintenance projects and systems for inclusion
                                  in budget requests;

                                • assess these projects or systems on the basis of expected costs,
                                  benefits, and risks to the organization;

                                • analyze these projects as a portfolio of competing funding options; and

                                • use this information to develop and support budget requests.

                                This focus on projects, their outcomes, and risks as the basic elements of
                                analysis and decision-making is incorporated in the IT investment
                                management approach that is recommended by the OMB and GAO.10 By
                                using these proven investment management approaches for budget
                                formulation, agencies have a systematic method, on the basis of risk and
                                return on investment, to justify what are typically very substantial budget
                                requests for the operations and maintenance of information systems. These
                                approaches also provide a way to hold IT managers accountable for


                                10
                                 See, for example, U.S. General Accounting Office, Information Technology Investment
                                Management: A Framework for Assessing and Improving Process Maturity, Exposure
                                Draft, GAO/AIMD-10.1.23 (Washington, D.C.: May 2000, Version 1).




                                Page 10                                                                   GAO-03-641T
operations and maintenance spending and the ongoing efficiency and
efficacy of existing systems.

In our assessment of IRS’s fiscal year 2003 budget request, we reported11
that IRS did not develop its information systems operations and
maintenance request in accordance with the investment management
approach used by leading organizations. For example, in developing the
request, IRS had not identified and assessed the relative costs, benefits, and
risks of specific operations and maintenance systems and projects. Instead,
according to IRS officials, they developed the request by beginning with the
fiscal year 2002 expenditures and simply adding amounts to fund cost-of-
living and salary increases. IRS officials attributed this gap between IRS’s
practices and those followed by leading organizations to the lack of an
adequate cost accounting system, cultural resistance to change, and a
previous lack of management priority. We recommended12 that IRS prepare
its fiscal year 2004 information systems budget request in accordance with
the investment management approach used by leading organizations. IRS
agreed and initiated actions to address our recommendation.

IRS has made progress in incorporating investment management practices
into the formulation of its fiscal year 2004 information systems budget
request. For example, IRS created information technology portfolios for its
operations and maintenance systems in accordance with revised OMB
budget guidance.13 According to IRS officials, these portfolios were used to
assist managers and staff involved with information technology planning
and investment decision-making to (1) assess initiatives in terms of their
cost, risks, and expected returns and (2) determine and maintain the
appropriate mix of investments. They also indicated that they are working
with Treasury and OMB to improve the information technology investment
portfolio development process. IRS’s emphasis on portfolio development
demonstrates an increased effort to ensure its information systems
operations and maintenance requests are supported.



11
  U.S. General Accounting Office, Internal Revenue Service: Assessment of Budget Request
for Fiscal Year 2003 and Interim Results of 2002 Tax Filing Season, GAO-02-580T
(Washington, D.C.: Apr. 9, 2002) and Internal Revenue Service: Improving Adequacy of
Information Systems Budget Justification, GAO-02-704 (Washington, D.C.: June 28, 2002).
12
     See GAO-02-580T and GAO-02-704.
13
     Office of Management and Budget, OMB Circular No. A-11.




Page 11                                                                    GAO-03-641T
                             Despite this progress, IRS has not yet completed its planned actions to
                             implement our recommendation. As of April 2003, IRS has not developed
                             an activity-based cost accounting system to enable it to account for the full
                             costs of operations and maintenance projects and determine how
                             effectively IRS projects are achieving program goals and mission needs.
                             IRS officials stated that they are developing an activity-based cost model in
                             conjunction with the Integrated Financial System modernization project,
                             but this model will not be fully implemented until December 2003.
                             Furthermore, IRS officials stated that data from this model will not be
                             available for use until the fiscal year 2006 budget formulation cycle. In
                             addition, IRS has still not completed its capital planning guidance, and thus
                             did not use it in preparing its fiscal year 2004 information systems budget
                             submission. According to IRS officials, the agency has developed a draft
                             Capital Planning and Investment Control guide that is undergoing internal
                             review, but it will not be completed and implemented until late October
                             2003. Until IRS incorporates the cost model and capital planning and
                             investment control guidance into the preparation of its information
                             systems budget request, IRS will not be able to ensure that the information
                             systems operations and maintenance request is adequately supported.



Interim Results of IRS’s     IRS’s filing season performance through mid-March has improved
                             compared to recent years, based on data we reviewed in five key filing
2003 Filing Season           season activities—paper and electronic processing, telephone assistance,
Show Improvement             IRS’s Web site, and walk-in assistance. For example, telephone access has
                             improved, and IRS’s Web site has seen increased use. While we cannot
over Previous Years          quantify the connection between these results and IRS’s ongoing systems
                             modernization efforts, the improvement in filing season performance, in
                             part, represents a payoff from systems modernization.



IRS’s Paper and Electronic   Through March 28, IRS has smoothly processed about 67 million individual
Processing Operations Have   income tax returns. According to IRS data and to officials and tax
                             preparers we spoke with, IRS has not experienced any significant
Gone Smoothly This Year
                             processing or computer problems. IRS officials attribute this year’s smooth
                             processing, in part, to the relatively insignificant tax law changes compared
                             to last year.

                             Electronic filing continues to grow, although at a slower rate than
                             projected. Of the approximate 67 million returns, about 26 million
                             individual income tax returns were filed on paper and 41 million returns



                             Page 12                                                           GAO-03-641T
were filed electronically, as of March 28, as shown in table 1. This
represents an increase in electronic filing of 10.4 percent over the same
time period last year. Whether IRS will achieve its goal of 54 million tax
returns filed electronically in 2003 is uncertain. Last year at this time IRS
was also below its goal, but made up the difference late in the filing season.




Page 13                                                           GAO-03-641T
Table 1: IRS Performance in the First Weeks of the 2003 and 2002 Filing Seasons


Volume in thousands
Actual returns processeda                                                  2002                  2003
     Paper                                                                29,014                26,289
  Electronic                                                              37,035                40,870
Telephone assistance
     Total callsb                                                         60,674                38,213
         Answered by assistors                                             9,540                 9,938
         Answered by automation                                           28,130                19,860
         Not answered                                                     23,004                 8,415
     Customer service representative level of serviceb                      69%                   84%
                                b
     Average speed of answer                                      216 seconds         155 seconds
     Accounts customer accuracy ratec                              88% +/- 1%          88% +/- 1%
                                        c
  Tax law customer accuracy rate                                   84% +/- 1%          81% +/- 1%
Internet assistance
     Forms and publications downloadedd                                  213,000           283,000
     Refund status inquiriese                                               N/A                 10,200
Walk-in assistance
     Returns prepared at IRS walk-in sitesf                                 436                   291
     Returns prepared at volunteer sitesg                                   466                   594
Source: IRS data.
a
    From January 1 to March 29, 2002, and January 1 to March 28, 2003.
b
    Based on actual counts from January 1 to March 23, 2002, and January 1 to March 22, 2003.
c
 Based on a representative sample estimated at the 90 percent confidence level from January to
February 2002 and 2003.
d
    From January 1 to March, 31 2002 and 2003.
e
    From January 1 to March 28, 2003.
f
From January 1 to March 16, 2002, and January 1 to March 15, 2003.
g
    From January 1 to March 9, 2002, and January 1 to March 8, 2003.


Growth in electronic filing is a key part of IRS’s modernization strategy.
Electronic filing allows IRS to control costs and improve customer service,
by reducing labor intensive processing of paper returns. This year, to help
increase electronic filing, IRS entered into an agreement with the Free File
Alliance, a consortium of 17 tax preparation companies, to offer free online
tax preparation and filing services for at least 60 percent of all taxpayers
via the IRS Web site. IRS data shows that as of March 26, about 2.1 million
returns were filed through the consortium, close to the goal of 2.5 million.



Page 14                                                                               GAO-03-641T
                               While there have been some complaints about pop-up ads, taxpayers
                               reported in IRS surveys that they were generally pleased with the service.

                               Because of the growth in electronic filing, the number of paper returns has
                               declined in recent years. As a result, IRS is closing processing operations at
                               the Brookhaven Submission Processing Center, one of its eight processing
                               centers for individual income tax returns filed on paper. This closing
                               represents a significant consolidation of IRS’s processing operations.
                               Based on processing data to date, the consolidation has not disrupted the
                               filing season.



Telephone Access Improved      Access to IRS’s toll-free telephone lines improved over last year. As table 1
over Last Year, While          shows, as of March 22, the percentage of taxpayers that attempted to reach
                               an assistor and actually got through and received service—referred to as
Accuracy Generally
                               the Customer Service Representative level of service—increased 15
Remained Stable                percentage points over the same period last year, for the approximately 10
                               million calls served. In addition, taxpayers have waited 61 seconds less, on
                               average, to speak to an assistor so far this filing season as compared to last
                               year. According to IRS officials, the increase in the level of service is largely
                               due to lower than expected call demand and more effective routing of calls
                               to qualified assistors. Part of the reason for the decrease in demand is that
                               some taxpayers are using the new refund status check feature on IRS’s Web
                               site rather than calling.

                               Accuracy was relatively stable this year as compared to last year. As shown
                               in table 1, taxpayers who called about their accounts received correct
                               information an estimated 88 percent of the time. IRS officials said that
                               accounts accuracy rates remained stable, because many simple refund
                               inquiries were diverted to the new refund feature on IRS’s Web site, leaving
                               assistors to handle more complex calls. Table 1 also shows taxpayers who
                               called with tax law questions received correct information an estimated 81
                               percent of the time, slightly down from last year. According to IRS officials,
                               because many assistors had difficulty in adapting to a change in the guide
                               used to query callers.



Web Site Is Seeing Increased   IRS’s Web site use has increased over last year. About 283 million forms and
Use and Has New Features,      publications have been downloaded—a 29 percent increase over the same
                               period last year. In addition, an independent study reported that IRS’s Web
although Concerns about        site had ranked in the top 10 out of 40 government web sites and that users
Usability Still Exist


                               Page 15                                                              GAO-03-641T
                            were able to access IRS’s site in less than one second during the January 20
                            through February 28 test period.

                            IRS added a new feature to its Web site for use this filing season: the refund
                            status check, (“Where’s My Refund?”). This feature enables taxpayers to
                            find out if the IRS received their returns and whether their refunds were
                            processed. IRS intended this feature to divert some simple telephone calls
                            from assistors. Data shows that as of March 28, about 10.3 million
                            taxpayers have used this feature to check the status of their refund.

                            While some of the problems we identified in previous years appear to have
                            been remedied, we continue to have concerns about the search function on
                            IRS’s Web site. Our informal testing of IRS’s Web site showed that it is more
                            user friendly than last year. We found it to be more accessible, easier to
                            navigate, and data was more current. However, the search functions still do
                            not always make the most pertinent information readily available. For
                            example, when we typed “earned income tax credit” into the forms and
                            publication search function, Publication 596—the primary publication on
                            the earned income tax credit—was the 70th item on the list, and we had to
                            scroll through seven pages to find it. According to IRS officials, an
                            independent contractor is currently looking at ways to improve the search
                            functions, and the contractor expects to issue its report in mid-April of this
                            year.



Walk-in Assistance           The quality of assistance at IRS’s walk-in sites has improved this year over
Improved and Community      last, and service to taxpayers through community based coalitions has
                            increased. At congressional direction, the TIGTA has been responsible for
Based Coalitions Expanded
                            measuring the quality of assistance at IRS’s walk-in sites. According to
over Last Year              TIGTA officials, the accuracy of tax law assistance provided at IRS’s walk-
                            in sites increased as of February this year to about 73 percent—an increase
                            of 27 percentage points over the same period last year. TIGTA also found
                            that the rate at which IRS employees referred taxpayers to a publication
                            instead of answering tax law questions—which had been an issue last
                            year—declined by about 85 percent.

                            According to TIGTA officials, the increased accuracy rates resulted from
                            various steps taken by IRS, including revising to the guidelines used by
                            walk-in staff, certifying staff proficiency, conducting monthly reviews of
                            tax law accuracy, and taking immediate action to address review
                            information relating to any incorrect answers or improper referrals found
                            during IRS or TIGTA quality reviews.



                            Page 16                                                            GAO-03-641T
               As table 1 shows, more taxpayers had their returns prepared by
               community-based coalitions and other organizations that provide free tax
               return-preparation assistance as part of IRS’s Volunteer Income Tax
               Assistance and Tax Counseling for the Elderly programs. These programs
               use IRS-trained volunteers to help prepare basic tax returns for taxpayers
               with special needs—including those with a low to fixed income, non-
               English speaking people, and the elderly.



Concluding     As the examples of improved telephone access and the Brookhaven
               Processing Center closing show, IRS is beginning to realize payoffs from
Observations   the ongoing systems modernization investments and wider management
               improvements. Although IRS has not succeeded in reallocating staff to one
               of its priority needs, compliance, there will likely be increased potential for
               such reallocation as modernization proceeds. This will present Congress, in
               its oversight and appropriations roles, with significant opportunities to
               weigh in on IRS’s overall strategy for better accomplishing its mission.
               Specifically, Congress will have opportunities to help IRS establish
               strategic priorities and make decisions about the resources needed to meet
               those priorities.

               Mr. Chairman, this concludes my prepared statement, and I would be
               pleased to respond to any questions.




               Page 17                                                            GAO-03-641T
Appendix I

How IRS Allocated Expenditures and Staff                                                 Appendx
                                                                                               ies




Resources in Fiscal Year 2002                                                             Append
                                                                                               x
                                                                                               Ii




              To provide some context for understanding the 2004 budget request, figures
              2 and 3 illustrate how the Internal Revenue Service (IRS) allocated
              expenditures and staff resources in fiscal year 2002, the most recently
              completed year. Figure 2 shows IRS’s fiscal year 2002 actual expenditures
              in several categories, including about 69 percent that was spent on labor.
              Figure 3 shows how IRS allocated its labor across functional areas,
              including ensuring compliance such as auditing and collecting delinquent
              taxes (45 percent), providing taxpayer services such as telephone
              assistance (21 percent), and processing tax returns (15 percent). However,
              the boundaries between categories may not be as well defined as the
              figures indicate. For example, in figure 3, staff categorized as maintaining
              information systems could also be considered under support for
              processing, taxpayer service or compliance. Therefore, the figures are
              meant to provide a summary of how IRS uses its resources and should be
              interpreted with caution.




              Page 18                                                          GAO-03-641T
Appendix I
How IRS Allocated Expenditures and Staff
Resources in Fiscal Year 2002




Figure 2: IRS’s Expenditures in Fiscal Year 2002 1

                                               Labor $7.1 billion



                                               4%
                                               Equipment $.41 billion


                                               Rent, communications,
                                               and utilities
                                               $1.1 billion
                                                                          Total expenditures
                                    10%                                   $10.4 billion

                                               Contracts $.94 billion
                                      9%
                                          8%   Other nonlabor costs
              69%                              $.81 billion




Source: GAO analysis of IRS data.




1
 IRS's annual expenditures may exceed its current year appropriations, because IRS has
additional budgetary resources available to it and also incurs certain costs that were funded
in prior years. During fiscal year 2002, IRS's total budgetary resources included its fiscal
year 2002 appropriation of $9.437 billion as well as unobligated balances available from
prior years, spending authority from offsetting collections, and recoveries of prior year
obligations.




Page 19                                                                         GAO-03-641T
           Appendix I
           How IRS Allocated Expenditures and Staff
           Resources in Fiscal Year 2002




           Figure 3: How IRS Spent Its 99,180 Staff Years in Fiscal Year 2002

                                                             Maintaining information systems
                                                             7,688 staff years

                                                             Providing management and other services
                                                             10,892 staff years


                                                             Assisting taxpayers via telephone, e-mail,
                                                             and correspondence
                                                             14,898 staff years

                                                             Offering other taxpayer assistance
                                                             5,805 staff years,
                                                             including:
                                                             2,088 for face-to-face assistance
                                                             1,299 for publication/education
                                                             2,418 for web site and other assistance
                                     11%         15%
                              8%
                                                       6%
                          9%
                                                             Processing tax returns
                                                       15%   15,101 staff years
                            14%
                                                             Conducting examinations
                                               22%           21,771 staff years,
                                                             including:
                                                             16,417 for field examinations
                                                             3,703 for electronic examinations
                                                             1,651 for document matching

                                                             Collecting taxes
                                                             13,861 staff years,
                                                             including:
                                                             7,917 for field collections
                                                             5,944 for electronic collections

                                                             Other compliance
                     15,101 staff years                      9,164 staff years,
                     processing tax returns                  including:
                                                             3,638 for criminal investigation
                     18,580 staff years supplying
                                                             3,269 for appeals and litigation
                     program support
                                                             2,257 for taxpayer advocate case processing
                     44,796 staff years ensuring             and other actions
                     compliance with the tax law
                     20,703 staff years assisting
                     taxpayers
           Source: GAO analysis of IRS data.




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