oversight

IRS Modernization: Continued Progress Necessary for Improving Service to Taxpayers and Ensuring Compliance

Published by the Government Accountability Office on 2003-05-20.

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

                             United States General Accounting Office

GAO                          Testimony
                             Before Congressional Committees



For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, May 20, 2003
                             IRS MODERNIZATION
                             Continued Progress
                             Necessary for Improving
                             Service to Taxpayers and
                             Ensuring Compliance
                             Statement of James R. White
                             Director, Strategic Issues

                             Robert F. Dacey
                             Director, Information Technology Systems Issues

                             Steven J. Sebastian
                             Director, Financial Management and Assurance




GAO-03-796T
                             a
                                               May 20, 2003


                                               IRS MODERNIZATION

                                               Continued Progress Necessary for
Highlights of GAO-03-796T, a report to         Improving Service to Taxpayers and
Congressional Committees
                                               Ensuring Compliance



Congress passed the IRS                        IRS’s accomplishments in the 5 years since the act was passed are
Restructuring and Reform Act of                significant. IRS has increased its capacity to manage with, for example,
1998 in response to frustration with           more effective controls over information system acquisition and better
the Internal Revenue Service’s                 performance measures. In addition, the improvements have had a noticeable
(IRS) inability to effectively carry           impact on service to taxpayers. Taxpayers have an easier time reaching IRS
out its mission. IRS’s inability to
deliver new computer systems that
                                               by telephone and are increasingly using IRS’s Web site to download tax
worked, allegations of abuse of                forms and publications and check the status of their refunds. Nevertheless,
taxpayers by IRS employees, and                IRS is only part of the way to where taxpayers and Congress expect it to be.
taxpayers greeted by busy signals
when calling IRS for assistance all            Compliance is perhaps IRS’s greatest challenge looking forward. Although
fed the frustration. The act set two           IRS lacks current data about the level of voluntary compliance, what is
goals for IRS—improve service to               known is that there have been significant and pervasive declines in many of
taxpayers while continuing to                  IRS’s key compliance and collections programs. As a result of these
enforce compliance with the tax                declines, taxpayers have less incentive to voluntarily comply, thereby
laws. The act also mandated                    potentially undermining the integrity of the tax system and risking revenue
annual joint congressional                     collections. Reversing this decline will be a challenge. Another challenge
oversight hearings, of which this is
the fifth and final.
                                               will be closing the gap between the level and quality of taxpayer services
                                               that IRS provides and what Congress and taxpayers want and expect.
                                               Despite improvements, almost one-third of callers receive busy signals or
                                               hang up without receiving service, and almost 20 percent get incorrect
GAO is not making any new                      answers to tax law questions.
recommendations. However,
numerous recommendations made                  The means for realizing IRS’s goals is continued progress modernizing, but
in previous GAO reports about how              this will be a challenge. The scope and complexity of the business systems
to deal with the challenges facing
                                               modernization is growing, but management capacity is still maturing. Long-
IRS are cited.
                                               standing computer security weaknesses continue to threaten the
                                               confidentiality, integrity, and availability of sensitive systems and taxpayer
                                               data. Performance, financial, and human capital management all need
                                               further improvement. IRS is also challenged to realize the increased staffing
                                               levels for service and compliance called for in recent IRS budget requests.

                                               IRS’s Key Modernization Challenges




www.gao.gov/cgi-bin/getrpt?GAO-03-796T.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact James R. White
at (202) 512-9110 or whitej@gao.gov.
Mr. Chairman and Members of the Committees:

We are pleased to be here today to contribute to this joint oversight
hearing on the Internal Revenue Service (IRS). Five years ago, Congress
passed the IRS Reform and Restructuring Act of 19981 (Restructuring Act),
as part of an effort to modernize IRS and provide taxpayers with
additional rights and protections. In this hearing, the fifth and final one
mandated by the Restructuring Act, we will report on IRS’s
accomplishments over recent years and the challenges ahead.

Throughout the 1990s, Congress grew increasingly frustrated with IRS’s
inability to effectively carry out its mission. IRS’s inability to deliver new
computer systems that worked, allegations of abuse of taxpayers by IRS
employees, and taxpayers greeted by busy signals when calling IRS for
assistance all fed the frustration. In response, Congress established the
National Commission on Restructuring IRS in 1995 and passed the
Restructuring Act in 1998, which increased Congress’s oversight of the
agency. In passing the act, Congress set two basic goals for IRS: improve
service to taxpayers while continuing to enforce compliance with the tax
laws.

Since passing the Restructuring Act, Congress has maintained its
increased oversight of IRS. For example, Congress has reviewed IRS’s
expenditure plans for its Business Systems Modernization (BSM) program
before allowing authorized funds to be spent. Congressional committees
have also held numerous hearings on IRS’s modernization progress,
including the five joint oversight hearings.

In addition to oversight, Congress has invested in IRS. In the last 5 years,
Congress has appropriated $1.35 billion for BSM. Congress also has
virtually fully funded IRS’s annual budget requests for each year.

Now, halfway through the 10 years that the then Commissioner projected
modernization would take, is a good time to take stock—to look back on
what has been accomplished to date. We are pleased to report that, while
still far from realizing the goals set by the Restructuring Act, what has
been accomplished is significant.




1
Pub. L. 105-206.



Page 1                                                             GAO-03-796T
•   IRS has increased its capacity to manage. While still only partway to where
    it needs to be, IRS has put in place an organizational structure and
    improved processes to set strategic priorities, allocate resources, and
    achieve results aligned with priorities. IRS has established a strategic
    planning and budgeting process, put in place many of the management
    controls needed to effectively acquire and implement modernized business
    information systems, reorganized around taxpayer groups, established a
    balanced performance measurement system, implemented a new
    employee evaluation system, and issued reliable annual financial
    statements.

•   The modernization accomplishments to date have had a noticeable impact
    on service to taxpayers. For example, taxpayers are more frequently
    reaching, and waiting less time to speak to, telephone assistors and are
    increasingly using IRS’s Internet Web site to download forms and
    publications and get other types of information, such as the status of their
    refund.

    The service improvements mean that the congressional oversight, efforts
    made by IRS managers and employees, and dollars invested in
    modernization are beginning to show payoffs that American taxpayers can
    see. Less apparent on the list of accomplishments is compliance. While
    several significant compliance efforts have been started, few have been
    completed.

    With a new commissioner just confirmed, now is also a good time to list
    the challenges facing IRS in the coming 5 years. Last year in this same
    hearing, we said that IRS was at a critical juncture, in part, because of the
    impending change of commissioners and the challenges a new
    commissioner would face. With the change just completed, IRS remains at
    essentially the same critical juncture. Both of IRS’s goals—improving
    taxpayer service and ensuring compliance—are challenges. Similarly, the
    means for achieving these goals—modernization of management and
    systems—is a challenge. Without continued focus by managers and
    employees on modernizing, IRS would put the progress made to date at
    risk and jeopardize the possibility of realizing Congress’s twin goals for
    modernization.

•   The area where progress is least apparent—compliance—is perhaps IRS’s
    most significant risk and greatest challenge looking forward. Compliance
    is a risk, in part, because neither IRS nor we know the level of voluntary
    compliance, which compliance problems are the most significant, and
    what the impact changes and IRS’s compliance programs and efforts have
    on the level of voluntary compliance. What is known is that there have

    Page 2                                                           GAO-03-796T
                       been significant and pervasive declines in many of IRS’s key compliance
                       and collections programs. The declines can be seen in measures such as
                       cases closed, staffing levels, cases not worked, and the inventory of
                       uncollected tax debt. As a result of these declines, taxpayers have less
                       incentive to voluntarily comply, thereby potentially undermining the
                       integrity of the tax system and risking revenue collections. Reversing this
                       decline will be a challenge.

                   •   While service to taxpayers has improved, gaps remain between the quality
                       of taxpayer services that IRS provides and what Congress and taxpayers
                       want and expect. For example, while the percentage of callers who receive
                       busy signals or hang up without receiving service has fallen since 1997, it
                       still remains at 32 percent.

                   •   Continuing the progress that has been made in modernizing management
                       remains another challenge. The scope and complexity of the BSM is
                       growing, but management capacity is still maturing. Long-standing
                       computer security weaknesses continue to threaten the confidentially,
                       integrity, and availability of sensitive systems and taxpayer data.
                       Performance, financial, and human capital management all need further
                       improvement. Finally, realizing the increased staffing levels for service and
                       compliance called for in recent IRS budget requests has not always been
                       possible.

                       Our assessment of both major accomplishments and key challenges is
                       based primarily on recently issued GAO products and ongoing reviews.


                       Over the 5 years since the Restructuring Act was passed, IRS has made
IRS Has Improved       significant progress in modernizing. Figure 1 shows some of the major
Management and         accomplishments of the last 5 years. The figure includes actions that have
                       been implemented or completed and that represent significant steps in the
Taxpayer Service       overall modernization effort. The figure is meant to illustrate important
                       progress—it does not show every accomplishment.




                       Page 3                                                          GAO-03-796T
                               Figure 1: Selected Major IRS Accomplishments in Modernizing, 1999-2003




                               Most of the accomplishments shown in figure 1 are internal management
                               improvements that will not be noticed by taxpayers, such as management
                               controls for information systems acquisition and implementation. While
                               such improvements do not directly affect taxpayers, they should lay a
                               foundation for improving service and ensuring compliance.

                               Figure 1 does include some accomplishments that are noticeable to
                               taxpayers such as the ability to check the status of their refund using the
                               Internet and the increase in electronically filed returns. One
                               accomplishment—the new software for revenue agents to help conduct
                               business audits—involves IRS’s enforcement programs.


IRS Has Made                   IRS has completed a number of major modernization steps to help
Management                     improve management of its operations. While IRS still faces challenges in
Improvements                   each of the areas discussed below, the steps completed to date are major
                               accomplishments.

Modernizing Business Systems   IRS’s multibillion dollar BSM program is critical to the success of the
                               agency’s efforts to transform its manual, paper-intensive business



                               Page 4                                                             GAO-03-796T
operations and fulfill its obligations under the Restructuring Act. To date,
about $1.35 billion has been appropriated and released for BSM.

IRS’s challenges in modernizing its business systems date back to the mid-
1990s, when we reported on a number of technical and management
weaknesses and made a series of recommendations for correcting them
and limiting modernization activities and spending until they were
corrected.2 It was then that we designated the modernization program as a
high-risk area.3 These challenges remained virtually unchanged until 1999,
as IRS made limited progress in correcting its weaknesses and our ongoing
reviews of the program continued to identify additional weaknesses and
produce additional recommendations.

Beginning in 1999, IRS started making progress in strengthening its
modernization management controls and capabilities. For example, IRS
submitted and Congress approved the first of a series of expenditure, or
spending, plans for BSM. These plans facilitate congressional oversight
and provide a description of the expenditures, functionality, and delivery
schedule planned for each project. Other notable accomplishments since
1999 include (1) developing and using a modernization blueprint,
commonly called an enterprise architecture, to guide and constrain its
modernization projects and (2) investing incrementally in its projects, both
of which are leading practices of successful public and private sector
organizations.

Since 2001, IRS has progressed in establishing the infrastructure on which
future business applications will run. Establishing this infrastructure is a
necessary prerequisite for business applications that are intended to
provide benefits to taxpayers and IRS. In addition, it has delivered three
applications that are today producing benefits. For example, the Customer
Communications 2001 project improved the telecommunications




2
 U.S. General Accounting Office, Tax Systems Modernization: Management and
Technical Weaknesses Must Be Corrected If Modernization Is to Succeed,
GAO/AIMD-95-156 (Washington, D.C.: July 26, 1995), and 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).
3
 U.S. General Accounting Office, High-Risk Series: An Overview, GAO/HR-95-1
(Washington, D.C.: February 1995).



Page 5                                                                    GAO-03-796T
                                infrastructure, including telephone call management, call routing, and
                                customer self-service applications.4

                                In response to congressional direction and our previous concerns about
                                projects getting ahead of the agency’s ability to manage them effectively,5
                                IRS scaled back its projects, giving priority to implementing needed
                                management capacity. In our February 2002 report,6 we again
                                recommended that the Commissioner of Internal Revenue reconsider the
                                scope and pace of the program to better balance it with the agency’s
                                capacity to handle the workload. In response, IRS took steps to better
                                align the pace of the program with the maturity of IRS’s controls and
                                management capacity, including reassessing the portfolio of projects that
                                it had planned to proceed with during the remainder of fiscal year 2002
                                and reducing the planned scope and pace of the program for fiscal year
                                2003.

Securing Taxpayer Information   Information security is a critical consideration for any organization that
                                depends on information systems and computer networks to carry out its
                                mission or business. It is especially important for government agencies,
                                like IRS, where the public’s trust is essential. The dramatic expansion in
                                computer interconnectivity and the rapid increase in the use of the
                                Internet are changing the way IRS communicates and conducts business.
                                Without proper safeguards they also pose enormous risks that make it
                                easier for individuals and groups with malicious intent to access sensitive
                                information, commit fraud, or disrupt operations.

                                Due to the nature of its mission, IRS collects and maintains a significant
                                amount of personal and financial data on each American taxpayer. These
                                data typically include the taxpayer’s name, address, Social Security
                                number, dependents, and income. The confidentiality of this sensitive
                                information is important because if this information is disclosed to


                                4
                                 The other two are Customer Relationship Management Examination, which provides off-
                                the-shelf software to IRS revenue agents to allow them to accurately compute complex
                                corporate transactions, and Internet Refund/Fact of Filing, which improves customer self-
                                service by providing taxpayers with instant refund status information and instructions for
                                resolving refund problems via the Internet.
                                5
                                 U.S. General Accounting Office, Business Systems Modernization: Results of Review of
                                IRS’ March 2001 Expenditure Plan, GAO-01-716 (Washington, D.C.: June 29, 2001).
                                6
                                 U.S. General Accounting Office, Business Systems Modernization: IRS Needs to Better
                                Balance Management Capacity with Systems Acquisition Workload, GAO-02-356
                                (Washington, D.C.: Feb. 28, 2002).



                                Page 6                                                                       GAO-03-796T
                                unauthorized individuals, taxpayers could be exposed to a loss of privacy
                                and to financial loss and damages resulting from identity theft and
                                financial crimes.

                                IRS has made important progress toward improving information security
                                over taxpayer data and implementing a comprehensive agencywide
                                information security program. It has established and updated a substantial
                                set of information security policies, standards, and guidelines that
                                generally provide appropriate guidance to personnel responsible for
                                securing IRS information systems and data. If effectively implemented,
                                these would protect IRS information systems and taxpayer data from
                                many threats. IRS has also increased the resources devoted to securing its
                                systems and data—increasing, for example, the number of specialists
                                assigned to the office responsible for ensuring that IRS has effective
                                security programs in place. To help improve the security of IRS’s systems
                                and taxpayer data, IRS has also (1) implemented and improved control
                                measures that limit physical access to facilities and computing resources
                                and (2) established a virus protection and eradication program that helps
                                to protect against new malicious software threats as they emerge.

Reorganizing IRS and Managing   A major principle of IRS’s modernization strategy is that understanding the
Performance                     taxpayer’s point of view and improving service is fundamental to helping
                                the majority of taxpayers who are willing to comply with the tax laws and
                                pay what they owe. To help realize this customer-focused approach to
                                providing service, in October 2000 IRS reorganized into four divisions,
                                each responsible for a group of taxpayers with similar needs, such as IRS’s
                                Small Business/Self-Employed Division.

                                A sound organizational performance and human capital management
                                system is essential for assessing how well IRS meets its goals and for
                                identifying and making programmatic improvements. IRS has made
                                progress by establishing a system of balanced measures to hold managers
                                and frontline staff more accountable for improving performance. For
                                example, IRS determined that the three elements of balanced measures
                                were customer satisfaction, employee satisfaction, and business results
                                (quality and quantity measures) to ensure balance among priorities.
                                Similarly, in October 2001, IRS implemented its new employee evaluation
                                system for frontline employees. This main human capital management
                                system, like the one implemented earlier for executives and managers, was
                                designed to structurally align performance expectations for employees
                                with IRS’s three strategic goals to encourage behaviors and actions that
                                support and advance those goals.



                                Page 7                                                         GAO-03-796T
                      In 2000, IRS implemented a new strategic planning and budgeting process
                      that provides the framework for developing goals, objectives, and
                      measures at the operating division level. Although we have not evaluated
                      the effect of the process on IRS performance, the operating divisions are
                      identifying strategic goals intended to be tailored to the specific
                      characteristics and needs of their taxpayers. IRS senior management is
                      also using the process to reconcile competing priorities and resource
                      needs of the operating divisions.

Improving Financial   Current and accurate financial information is critical to informed decision
Management            making by senior management. IRS has made considerable progress
                      towards improving financial management, including achieving unqualified
                      (clean) audit opinions on financial statements.

                      When former Commissioner Rossotti was confirmed in November 1997,
                      IRS was exhibiting virtually the same pervasive financial management
                      weaknesses we had been reporting since we began auditing IRS’s financial
                      statements in 1992. These weaknesses, which led GAO to add IRS financial
                      management to its high-risk list in 1995,7 stemmed not only from IRS’s
                      reliance on obsolete and inadequate financial management systems, but
                      also from the serious weaknesses in IRS’s policies and procedures. In the
                      five years that have passed since 1997, however, IRS has made
                      considerable progress in addressing weaknesses in its financial
                      management systems and internal controls by, for example, committing
                      extensive additional resources. This and other efforts have resulted in
                      reducing the number of material internal control weaknesses and attaining
                      unqualified opinions on its financial statements. This achievement was due
                      in no small part to the strong commitment made by senior IRS
                      management.

                      During our audit of IRS’s custodial financial statements8 in fiscal year 1997,
                      we found material weaknesses in IRS’s internal controls that had shown
                      little improvement since our first audit in fiscal year 1992. These
                      weaknesses included an inadequate financial reporting process,


                      7
                      GAO/HR-95-1.
                      8
                       The Custodial Financial Statements report the assets, liabilities and results of activities
                      related to IRS responsibilities for implementing federal tax legislation, including collecting
                      federal tax revenue, refunding overpayments of taxes, and pursuing collections of amounts
                      owed. IRS also has administrative activities, which include managing costs funded by
                      appropriations and reimbursements from other federal agencies, state and local
                      governments, and the public.



                      Page 8                                                                         GAO-03-796T
                       deficiencies in controls to properly manage unpaid assessments, and
                       deficiencies controls over tax refunds and computer security. To
                       overcome these weaknesses, IRS implemented extensive compensating
                       procedures that enabled it to derive reliable balances related to its
                       custodial activity such as taxes receivable, enabling IRS to receive, for the
                       first time in fiscal year 1997, an unqualified opinion on its custodial
                       financial statements.

                       During fiscal years 1998 and 1999, we were unable to issue a clean opinion
                       on five of IRS’s six financial statements due to the continued affects of the
                       material weaknesses in IRS’s internal controls. We were able to continue
                       to issue unqualified opinions on IRS’s statements of custodial activity,
                       primarily due to IRS’s extensive use of compensating procedures.

                       Beginning in fiscal year 2000, IRS received an unqualified opinion on all six
                       of its financial statements by successfully producing a single set of
                       financial statements that were fairly stated in all material respects. This
                       significant achievement was made possible by years of strong commitment
                       and hard work by both IRS senior management and staff to develop and
                       implement compensating procedures to overcome the fundamental
                       systems and internal control deficiencies that continued to exist and
                       enable IRS to report reliable financial balances at fiscal year-end. IRS also
                       instituted monthly reconciliations of its Fund Balance with Treasury, a
                       process similar to companies or individuals reconciling their checkbooks
                       to monthly bank statements, thereby eliminating this issue as a material
                       weakness.

                       In fiscal year 2002 IRS reported its financial results and received an
                       unqualified audit opinion 6 weeks after the close of the fiscal year—about
                       75 days ahead of the reporting deadline required by the Office of
                       Management and Budget. As before, this achievement, and continued
                       progress in addressing its material internal control weakness, was the
                       culmination of years of IRS efforts to refine the compensating procedures
                       it has relied on to overcome material weaknesses, in its internal controls,
                       as well as making substantive improvements in the way it records
                       transactions, maintains records, and reports financial results.


Taxpayers Have Seen    IRS has improved and expanded service to taxpayers, including the
Some Improvements in   accessibility of telephone assistance and increased electronic filing and
Service                Internet services. These improvements are a significant accomplishment,
                       but IRS taxpayer service is not yet at the level that taxpayers and Congress
                       want. Also, IRS has begun to reap some rewards from electronic filing—

                       Page 9                                                           GAO-03-796T
                             for example, the closing of its paper processing operations at its
                             Brookhaven location.

Improved Telephone Service   Since the mid-1990s, access to telephone assistance, an important function
                             that affects millions of taxpayers, has improved. In 1997, about 49 percent
                             of calls to IRS primary assistance lines either received a busy signal or
                             were abandoned before being answered. This compares to about 32
                             percent of calls to date in 2003. As figure 2 illustrates, other measures of
                             access show improvement as well. The percentage of calls where
                             taxpayers attempted to reach an assistor and received service increased
                             from about 70 to 83 percent between the 2001 and 2003 filing seasons. The
                             figure also shows that callers are waiting less time to speak with an
                             assistor and are hanging up less frequently before getting through.
                             Telephone service is important because it affects so many taxpayers. In
                             2002, IRS received over 100 million phone calls.

                             IRS’s telephone service improvements are, in part, the results of numerous
                             improvement efforts sustained over time. In 1999, IRS centralized its toll-
                             free telephone operations and established the Joint Operations Center to
                             enable it to route calls to assistors across the country based on actual
                             availability data. Similarly, from 2000 through 2003, IRS made several
                             business process changes and implemented new technology. For example,
                             in 2001, IRS shifted millions of calls to its automated service so it could
                             use its assistors to answer more challenging taxpayer calls. Also, as part of
                             its Customer Communications Project, IRS enhanced its call routing
                             system.

                             Figure 2 shows that the accuracy of tax law information provided to
                             taxpayers by assistors has remained relatively stable. According to IRS
                             officials, accuracy stayed stable despite simpler calls being routed away
                             from assistors to automated systems.




                             Page 10                                                          GAO-03-796T
                                  Figure 2: Improvements in IRS’s Service and Assistor Response, 2000-2003




                                  Note: CSR level of service–of the calls that IRS estimates were from taxpayers attempting to reach
                                  an assistor, the calls that received service; Assistor response level–of the calls that reached an
                                  assistor, the percentage in which the caller waited 30 seconds or less; Abandon rate–of the calls
                                  routed to an assistor, the percentage that hung up before speaking to an assistor; and Tax law
                                  correct response rate–of the calls in which IRS provided tax law information, the percentage in which
                                  the assistor provided correct answers. IRS has comparable data only for the years shown.
                                  Accessibility data covers the period of January through mid-April. The correct response rate covers
                                  the period January through April and is an estimate (90-percent confidence level +/- 1 percentage
                                  point).


Increased Electronic Filing and   Although it still represents less than half of all individual income tax
Internet Services                 returns, electronic filing grew from almost 12 million returns in 1995 to an
                                  estimated 53 million in 2003, as shown in figure 3. The figure also shows
                                  that the number of paper returns is declining. The growth of electronic
                                  filing is one key to IRS’s modernization strategy, because electronic filing
                                  allows IRS to control costs and improve customer service by reducing
                                  labor-intensive processing of paper tax returns. As a result, IRS is phasing
                                  out its paper processing operations in the Brookhaven location.




                                  Page 11                                                                               GAO-03-796T
Figure 3: Increase in Individual Electronic Returns and Decrease in Paper Returns,
1995-2003




Note: GAO estimated that, based on the number of returns received electronically to date, IRS will
receive a total of 53 million returns filed electronically in 2003.


Another indication that taxpayers are receiving payoffs from
modernization is the breadth and quality of the services provided on IRS’s
Internet Web site. The services being offered to taxpayers and tax
practitioners via the Web site have grown considerably over the last few
years, and it is used more each year by taxpayers and tax practitioners. As
of March 31, 2003, about 283 million forms and publications had been
downloaded since the beginning of the filing season.

IRS’s Web site is a critical part of modernization because, according to
IRS, it is more cost-effective than other methods of providing taxpayer
assistance, such as answering telephone calls. The IRS Web site currently
provides a way for taxpayers and tax practitioners to receive assistance
without having to call or visit an IRS office. Among other things, the site
provides the potential to download hundreds of tax forms and
publications, contains current information on tax issues and electronic
filing, and, in a more recent feature, gives taxpayers the opportunity to
check the status of their refunds. The capability to check the status of


Page 12                                                                              GAO-03-796T
                          refunds is particularly important because IRS data shows it has decreased
                          the refund call inquiries handled by IRS’s telephone operations and has the
                          potential to further decrease those calls, enabling assistors to handle more
                          complicated calls about tax laws or customer accounts that cannot be
                          answered through automation.


                          Despite the progress modernizing and the improvements in taxpayer
Key Challenges,           service, IRS faces significant challenges looking ahead. Perhaps IRS’s most
Especially in             significant risks and biggest challenges are in the area of compliance—an
                          area wherein accomplishments have not been very apparent. Compliance
Compliance, Remain        is a risk, in part, because IRS does not have current data on how well
                          taxpayers are complying with the tax laws and therefore cannot
                          appropriately target areas for improvement nor can assess the impact
                          changes to its compliance program have on the level of voluntary
                          compliance. However, the available data show declines in many of IRS’s
                          enforcement activities, such as collections. The declines have prompted
                          concerns that taxpayers’ willingness to voluntarily comply could be put at
                          risk. Meeting IRS’s goal of ensuring compliance is a challenge because of
                          the effort and resources that will be required to reverse these program
                          declines.

                          Meeting IRS’s goal of improving taxpayer service also presents a
                          challenge. Despite IRS’s accomplishments, there remains a gap between
                          the quality of service that taxpayers currently receive and the service that
                          taxpayers and Congress want and expect.

                          A key to ensuring compliance and improving taxpayer service is
                          continuing to modernize IRS’s management and systems. This includes
                          delivering modernized systems; ensuring computer systems security;
                          improving performance, financial, and human capital management; and
                          increasing resources for taxpayer service and compliance.


Declines in Enforcement   A visible enforcement program is considered by many as critical for our
Programs Make Ensuring    tax system to encourage voluntary compliance with the tax laws. While
Compliance a Challenge    improving taxpayer service may enhance voluntary compliance, taxpayers’
                          willingness to voluntarily comply with the tax laws depends in part on
                          their having confidence that their friends, neighbors, and business
                          competitors are paying their fair share of taxes. To provide that
                          confidence, IRS operates a number of compliance and collection
                          programs, including computerized checks for nonfiling and underreported
                          income, audits, and telephone and field collections. Collecting taxes due

                          Page 13                                                          GAO-03-796T
                               the government9 has always been a challenge for IRS, but in recent years
                               the challenge has grown.

Limited Information on         Understanding taxpayers’ compliance with the nation’s tax laws is
Voluntary Compliance           essential to IRS improving the effectiveness of its programs to enforce and
                               promote voluntary compliance. While IRS strives to ensure that
                               enforcement audits are targeted at noncompliant taxpayers, this has
                               become increasingly difficult to do because the information used to
                               identify potentially noncompliant tax returns is out of date. We remain
                               concerned about IRS’s ability to appropriately allocate its enforcement
                               resources, including staff, to its various compliance and collections
                               activities. Without current data on voluntary compliance, IRS does not
                               know which is the highest priority area of noncompliance.

                               IRS’s new effort to review compliance, the National Research Program
                               (NRP), should, if implemented as planned, provide IRS with the first up-to-
                               date information on compliance rates and sources of noncompliance since
                               it last measured the compliance rate using 1988 tax returns. IRS has
                               agreed with recommendations we made regarding implementation of NRP
                               and more effective use of such data in the strategic, planning, budgeting,
                               and performance management process.

Enforcement Program Declines   Absent measures of voluntary compliance, the only compliance-related
                               data available are on IRS’s enforcement programs. In recent years, steep
                               declines have occurred in some of IRS’s compliance programs for
                               individual taxpayers and in programs to collect delinquent taxes. These
                               trends have triggered concerns that taxpayers’ motivation to voluntarily
                               comply with their tax obligations could be adversely affected. Since the




                               9
                                Total unpaid taxes due the government include (1) delinquent taxes that IRS is attempting
                               to collect, (2) taxes that IRS knows are due but has decided not to pursue collecting, and
                               (3) an unknown amount of unpaid taxes that IRS has not identified.



                               Page 14                                                                     GAO-03-796T
mid-1990s, we have issued six reports on IRS compliance and collection
trends in response to congressional concerns.10

Figure 4 shows compliance program trends for various income ranges. The
audit contact rates for the highest and lowest income individuals
essentially converged at around .8 percent in fiscal years 2001 and 2002.
Most of the audits of the lowest income individuals dealt with earned
income credit claims. Document matching contact rates11 for all three
income ranges rose somewhat from 2001 through 2002. However, rates for
all three income ranges ended significantly lower in 2002 than 1993.




10
   U.S. General Accounting Office, Tax Administration: Audit Trends and Results for
Individual Taxpayers, GAO/GGD-96-91 (Washington, D.C.: Apr. 26, 1996); Tax
Administration: IRS’ Audit and Criminal Enforcement Rates for Individual Taxpayers
Across the Country, GAO/GGD-99-19 (Washington, D.C.: Dec. 23, 1998); Tax
Administration: Use of Nonaudit Contacts, GAO/GGD-00-7 (Washington, D.C.: Mar. 16,
2001); IRS Audit Rates: Rate of Individual Taxpayers Has Declined With the Effect on
Compliance Unknown, GAO-01-484 (Washington, D.C.: Apr. 25, 2001); Tax
Administration: Impact of Compliance and Collection Program Declines on Taxpayers,
GAO-02-674 (Washington, D.C.: May 22, 2002); and Tax Administration: IRS Should
Continue to Expand Reporting on Its Enforcement Efforts, GAO-03-378 (Washington,
D.C.: Jan. 31, 2003).
11
   Document matching is where IRS compares information provided by a third party, for
example a bank, against taxpayer return information to identify discrepancies.


Page 15                                                                  GAO-03-796T
Figure 4: IRS Individual Audit and Document Matching Contact Rates by Income Level, Fiscal Years 1993-2002




                                        Collection programs have also declined as shown in figure 5. As we
                                        reported in May 2002, from fiscal years 1996 through 2001 trends in the
                                        collection of delinquent taxes showed almost universal declines in
                                        collection program performance, whether measured in terms of
                                        percentage of workload completed,12 cases closed, direct staff time,
                                        productivity, or unpaid taxes collected.13 From 1996 through 2002, IRS was
                                        unable to keep up with the growth in collections workload.




                                        12
                                          Workload is the number of delinquent accounts assigned to field and telephone collection.
                                        Work completed is the number of delinquent accounts worked to closure, excluding
                                        accounts for which collection work has been deferred.
                                        13
                                           GAO-02-674.


                                        Page 16                                                                     GAO-03-796T
                       Figure 5: Percentage of Collections Workload Not Completed, Fiscal Years 1996 to
                       2002




                       The increasing gap between collection workload and work completed led
                       IRS in March 1999 to start deferring collection action on billions of dollars
                       in delinquencies. By the end of fiscal year 2002, after the deferral policy
                       had been in place for about 3 and one-half years, IRS had deferred taking
                       collection action on about $15 billion in unpaid taxes, interest, and
                       penalties. As of 2002, IRS was deferring collection action on about one out
                       of three collection cases. As of September 30, 2002, IRS had a total
                       inventory of $112 billion of known unpaid taxes with some collection
                       potential.14

Earned Income Credit   There are significant compliance problems associated with the EIC that
Noncompliance          have led us to list IRS’s tax administration of the credit as a high-risk area



                       14
                         The $112 billion includes two categories of known unpaid taxes: (1) taxes due from
                       taxpayers for which IRS can support the existence of a receivable with a taxpayer
                       agreement or a favorable court ruling (federal taxes receivable), and (2) compliance
                       assessments in which neither the taxpayer nor the court has affirmed that the amounts are
                       owed.



                       Page 17                                                                    GAO-03-796T
for the federal government.15 Under the code, taxpayers who meet earned
income, family size, and other requirements are authorized to claim the
EIC. The credit offsets the impact of the Social Security taxes paid by low-
income workers and is intended to encourage low-income persons to seek
work rather than welfare. For most recipients, the credit amount exceeds
the amount of their income tax liability; in such cases, because the credit
is refundable, the taxpayers receive a refund.

IRS estimates that of the $31.3 billion in EICs claimed by taxpayers in tax
year 1999, about $8.5 billion to $9.9 billion should not have been paid.16
This level of noncompliance has remained relatively unchanged even after
a 5-year effort to reduce it. IRS has to balance its efforts to combat
noncompliance with its efforts to ensure that qualified persons claim the
credit. With the data available, we were able to estimate that for every
three households that claimed the credit, there was an additional eligible
household that did not.17 Because IRS has struggled to reduce the
overclaim rate and because of the magnitude of the financial risk, EIC
noncompliance has been and remains both a management challenge and a
high-risk area.

Early in 2002, the Assistant Secretary of the Treasury and the IRS
Commissioner established a joint task force to seek new approaches to
reduce EIC noncompliance. The task force sought to develop an approach
to validate EIC claimants’ eligibility before refunds are made, while
minimizing claimants’ burden and any impact on EIC’s relatively high
participation rate. Through this initiative, administration of the EIC
program would become more like that of a social service program such as
Food Stamps or Social Security Disability, for which proof of eligibility is
required prior to receipt of any benefit. IRS’s 2004 budget proposes new
spending to implement this strategy and it intends to ramp up rapidly.
Planning and implementation for this initiative will proceed
simultaneously. The success of the initiative will depend on careful
planning and close management attention as IRS’s implementation
progresses.



15
 U.S. General Accounting Office, Major Management Challenges and Program Risks:
Department of the Treasury, GAO-03-109 (Washington, D.C.: January 2003).
16
 IRS estimated that $1.2 billion would be recovered as a result of enforcement efforts.
17
 U.S. General Accounting Office, Earned Income Tax Credit Eligibility and
Participation, GAO-02-290R (Washington, D.C.: Dec. 14, 2001).



Page 18                                                                      GAO-03-796T
Closing the Gap between    Despite progress, improving service to taxpayers remains a challenge for
Actual and Desired         IRS. The progress that IRS has made to date in modernizing has, as noted,
Taxpayer Service Remains   improved service but not to the level that taxpayers, Congress, and IRS
                           management agree is needed.
a Challenge
                           Providing good service to taxpayers by making it as easy as possible for
                           them to understand and meet their tax obligations could improve
                           voluntary compliance—payments and tax returns filed without IRS audit
                           and collection action—and reduce the need for these intrusive and costly
                           enforcement activities. According to IRS, preventing compliance problems
                           by educating and informing taxpayers, or helping taxpayers resolve
                           problems early on, is less expensive and time-consuming for both IRS and
                           the taxpayer than enforcement action taken later. Facilitating voluntary
                           compliance is especially important because the U.S. tax system relies on it.
                           About 98 percent of all tax revenue collected is paid through withholding,
                           remittances sent with tax returns, or other forms of payment without any
                           IRS enforcement action.

                           While IRS has improved service in some areas, millions of taxpayers still
                           have difficulty reaching IRS by telephone, and when they do, they may not
                           be able to rely on the accuracy of information IRS provides. For example,
                           IRS data shows that 32 percent of calls to IRS either received a busy signal
                           or were abandoned without receiving service. In addition, about 20
                           percent of callers received inaccurate information when calling IRS with
                           tax law questions.

                           Similarly, the accuracy of the assistance provided at IRS’s walk-in sites is
                           below expectations. While it has improved in recent years, 25 percent of
                           answers provided were incorrect so far in 2003.

                           Revamping taxpayer service will require that IRS simultaneously meet the
                           other significant management challenges discussed in this testimony. For
                           example, to ensure that changes result in efficient, improved service, IRS
                           will need to establish consistent, comparable measures and conduct more
                           and better program evaluations to identify ways to improve service.


Modernization Is Key to    Modernization is the means for achieving IRS’s two goals of improving
Improving Service and      service and ensuring compliance. Figure 6 shows four key components of
Ensuring Compliance        modernization. Each alone is a significant challenge—in combination they
                           are an even greater challenge.




                           Page 19                                                          GAO-03-796T
                        Figure 6: IRS’s Key Modernization Challenges




Delivering Modernized   IRS’s modernization strategy includes reengineering efforts intended to
Business Systems        automate or eliminate work, improve productivity, and free up staff time
                        that can then be redirected to service and compliance programs.
                        Reengineering efforts rely heavily on IRS’s BSM program.

                        Despite important progress in IRS’s BSM program, it remains a high-risk
                        challenge for two reasons.18 First, the scope and complexity of the
                        program are growing. Specifically, the number of projects under way
                        continues to increase, and the tasks associated with those projects that are
                        moving beyond design and into development are by their nature more
                        complex and risky. Second, IRS’s modernization management capacity is
                        still maturing. For example, IRS has yet to fully implement a strategic
                        approach to ensuring that it has sufficient human capital resources. It has
                        also yet to fully implement management controls in such areas as
                        estimating costs and employing performance-based contracting methods.

                        The continuing challenge for IRS is to ensure that the pace of acquiring
                        systems does not exceed the agency’s ability to manage them effectively, a
                        problem we have reported19 in the past. The imbalance between program
                        pace and management capacity adds significant cost, schedule, and
                        performance risks that escalate as a program advances. For example, as


                        18
                         U.S. General Accounting Office, High-Risk Series: An Update, GAO-03-119 (Washington,
                        D.C.: January 2003).
                        19
                         GAO-01-716 and GAO-02-356.



                        Page 20                                                                 GAO-03-796T
                            indicated in IRS’s March 2003 expenditure plan, most of the BSM
                            initiatives or project milestones experienced cost increases and/or
                            schedule delays exceeding 10 percent of the estimated cost and duration
                            stated in the November 2001 plan. Moreover, these risks increase as IRS
                            moves forward because interdependencies among current ongoing
                            projects and the complexity of associated workload activities to be
                            performed increase dramatically as more system projects are built and
                            deployed.

                            IRS has acknowledged these risks and has initiatives planned or under
                            way to address them. The timely implementation of these initiatives is
                            critical. While the lack of controls can be risky in a project’s early stages, it
                            is essential that such controls be in place when multiple interdependent
                            projects are being designed, developed, and implemented. To mitigate this
                            added risk, IRS needs to fully implement the remaining management
                            controls that we have recommended. Until that time, the BSM program
                            remains high risk, and we will continue to monitor IRS’s progress in this
                            area.

                            As the BSM program moves forward, there are several other challenges
                            and risks to the successful and timely implementation of future planned
                            modernized systems. A major issue is the ability to successfully integrate
                            modernized systems with the reengineered business processes being
                            implemented in the operating divisions. Failure to coordinate the
                            acceptance and operation of new systems may result in increased costs
                            and delayed delivery of benefits to taxpayers. Finally, a major concern for
                            all aspects of the program is the extent to which the program will be
                            consistently funded in an environment of budgetary deficits and
                            competing priorities. Without a consistent level of funding, IRS will have
                            difficulty establishing the infrastructure needed to build and sustain
                            additional modernized systems and expediting the replacement of the
                            outdated systems currently in use.

Ensuring Computer Systems   Although IRS has made important progress securing its systems,
Security                    information security remains a challenge. Long-standing computer control
                            weaknesses continue to threaten the confidentiality, integrity, and
                            availability of sensitive systems and taxpayer data. IRS’s inconsistent
                            implementation of electronic access controls at its facilities did not
                            effectively prevent, limit, or detect access to computing resources. In
                            addition, weaknesses in other information system controls (including
                            physical security, segregation of duties, software change controls, and
                            service continuity) reduced IRS’s effectiveness in protecting and
                            controlling physical access to assets, minimizing the risk of errors or

                            Page 21                                                             GAO-03-796T
                               fraud, mitigating the risk of unauthorized or inappropriate software
                               programs, and ensuring the continuity of data processing operations when
                               unexpected interruptions occur. Further, access to key computer
                               applications was not always limited to authorized persons for authorized
                               purposes. These weaknesses increased the vulnerability of data processed
                               by IRS’s information systems and continued to expose IRS’s tax
                               processing operations to disruption. As a result, we continued to report
                               information security as a material weakness in our report on IRS’s fiscal
                               year 2002 financial statements.20

                               An underlying cause of these weaknesses is that, although it has made
                               important progress, IRS had not yet fully implemented certain elements of
                               its agencywide information security program. The challenges facing IRS
                               are to adequately (1) identify and assess information security risks to
                               determine needed security measures, (2) implement and comply with its
                               security policies and controls to meet those needs, (3) promote awareness
                               and provide security-related training so that employees understand the
                               risks and the policies and controls that mitigate them, (4) monitor the
                               effectiveness of established policies and controls, and (5) mitigate known
                               security vulnerabilities. IRS has acknowledged the seriousness of its
                               information security weaknesses and has revised its approach to
                               implementing the agencywide information security program. Until IRS can
                               fully implement an effective program and adequately mitigate its
                               information security weaknesses, it will remain at heightened risk of
                               access to critical hardware and software by unauthorized individuals, who
                               could intentionally or inadvertently read, add, alter, or delete sensitive
                               data or computer programs. Such individuals could possibly obtain
                               personal taxpayer information and use it to commit financial crimes in the
                               taxpayer’s name (identity fraud), such as establishing credit and incurring
                               debt.

Improving Performance,         Challenges remain in three important areas of management—performance,
Financial, and Human Capital   financial, and human capital. As noted in our discussion of
Management                     accomplishments, IRS has made significant progress in these three areas.
                               By continuing to show progress in these areas, IRS will be better able to
                               improve taxpayer service and better ensure compliance.




                               20
                                U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2002 and 2001
                               Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002).



                               Page 22                                                                  GAO-03-796T
    Performance Management

    Our work over recent years shows that IRS faces challenges in managing
    and judging its performance.

•   First, IRS needs to ensure that its organizational performance measures
    are objective and reliable, consistent through time, and limited to key
    performance indicators. Such performance measures would enable IRS
    managers to monitor progress over time without being overwhelmed by
    too much information.

•   Second, IRS needs to associate explicit goals with its performance
    measures. Without goals, it is difficult to determine if appropriate progress
    is being made.

•   Third, IRS needs to conduct more and better programs evaluations. Such
    evaluations could help managers and staff better understand what they are
    trying to accomplish, how their actual performance compares to their
    objectives, and the reasons for any gaps. This would provide a more
    informed basis for determining how to improve performance.

•   Finally, in keeping with the Government Performance and Results Act of
    1993,21 IRS should continue its efforts to better link budget requests with
    program results. Such a link could allow Congress to make more informed
    budget decisions and better oversee IRS’s use of resources.

    Financial Management

    Financial systems and internal control weaknesses continue to preclude
    IRS from providing managers current, accurate financial information with
    which to make day-to-day decisions affecting IRS’s operations. These
    weaknesses include

•   an inadequate financial reporting process, resulting in IRS not being able
    to prepare reliable financial statements without extensive compensating
    procedures or not having current and reliable ongoing information to
    support management decision making and to prepare cost-based
    performance measures;




    21
      Pub. L. 103-62 was enacted to hold federal agencies accountable for achieving program
    results.



    Page 23                                                                    GAO-03-796T
•   weaknesses in controls over billions in unpaid tax assessments, resulting
    in IRS’s inability to properly manage unpaid assessments and leading to
    increased taxpayer burden;

•   weaknesses in controls over the identification and collection of tax
    revenues due the federal government and the issuance of tax refunds,
    resulting in potentially billions of dollars in improper payments and lost
    revenue to the federal government; and

•   weaknesses in controls over property and equipment, resulting in IRS’s
    inability to have reliable and timely information on its balance of property
    and equipment throughout the year and to reasonably ensure that its
    property and equipment are safeguarded and used only in accordance with
    management policy.

    These weaknesses and the computer security control weaknesses
    previously discussed render IRS incapable of reporting current, reliable
    information regarding its operations to management, Congress, and the
    public and adversely affect its ability to effectively fulfill its
    responsibilities as the nation’s primary collector of federal revenue. IRS’s
    financial management has been on our list of high-risk government
    operations since 1995.22

    The future challenge for IRS will be to continue the improvements made in
    recent years and develop and implement the fundamental long-term
    solutions that are needed to address the internal control weaknesses we
    have identified. Resolving many of IRS’s most serious financial
    management challenges will depend on the successful implementation of
    its new financial management system, which will not occur for several
    years. For example, IRS’s Integrated Financial System (IFS) is intended to
    provide IRS with a single general ledger that is compliant with existing
    standards and integrated with its subsidiary records. However, IFS is not
    scheduled to be fully functional and able to provide reliable cost
    information that can be used by IRS in routine management decision
    making until at least fiscal year 2005. IRS is also implementing the
    Customer Account Data Engine and the Custodial Accounting Project to
    replace the current primary taxpayer database and address IRS
    weaknesses in management of unpaid assessments. However, these
    systems are not scheduled for full implementation until at least fiscal year


    22
     U.S. General Accounting Office, Major Management Challenges and Program Risks: A
    Governmentwide Perspective, GAO-03-95 (Washington, D.C.: January 2003).



    Page 24                                                               GAO-03-796T
                           2007, at which time IRS’s custodial transactions will be fully integrated
                           with IFS. In the interim, several serious financial management issues will
                           continue to exist.

                           In the near term, however, some problems can be addressed through the
                           continued efforts and commitment of IRS senior management and staff.
                           IRS will need to continue to refine the accounting procedures it relies on
                           to compensate for the deficiencies in its automated systems. More
                           important, IRS will need to continue its efforts to enhance the way it
                           processes transactions, maintains records, and reports financial results.
                           Other problems, which involve IRS modernizing its financial management
                           systems, will take years to fully achieve and require the continued
                           commitment of the new Commissioner if they are to be brought to a
                           successful conclusion.

                           Human Capital Management

                           IRS’s new human capital performance management system could be a
                           powerful tool in helping the agency achieve its mission. The system could
                           reinforce behaviors that support strategic goals by clearly aligning
                           employee and organizational objectives, ensuring that managers’
                           expectations are specific and output- or outcome-oriented, and monitoring
                           whether employee feedback is useful and aligned with IRS’s goals. To help
                           ensure IRS achieves such benefits, we have made several
                           recommendations. For example, for telephone performance, we have
                           called for systems and evaluations to identify gaps in assistors’ skills, meet
                           training needs to fill those gaps, monitor and address the causes of
                           attrition, and ensure that human capital management practices help IRS
                           achieve taxpayer service goals. Similarly, with respect to BSM, we have
                           recommended full implementation of its strategic approach for ensuring
                           sufficient human capital resources.

Increasing Resources for   Realizing increased staffing levels for taxpayer service and compliance
Service and Compliance     programs, called for in IRS’s recent budget requests, has proven to be
                           challenging. Since 2001, IRS’s budget requests have made increasing its
                           compliance and collection staff one of several key priorities. In its 2001
                           budget request, IRS asked for funding for the Staffing Tax Administration
                           for Balance and Equity initiative, which was designed to provide additional
                           staff for examination, collection, and other enforcement activities.
                           However, as shown in figures 7 and 8, staffing in two key compliance and
                           collections occupations were lower in 2002 than in 2000. This continues a
                           general trend of declining staffing in these occupations for a number of
                           years.


                           Page 25                                                           GAO-03-796T
Figure 7: Number of Revenue Agents, Fiscal Years 1996-2002




Figure 8: Number of Revenue Officers, 1996-2002




The declines in compliance and collection staffing occurred for several
reasons, 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


Page 26                                                        GAO-03-796T
               completed fiscal year, 2002, IRS faced unbudgeted cost increases, such as
               rent and pay increases, of about $106 million. As a result, IRS had to delay
               hiring revenue agents and officers. IRS noted in its 2002 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 has also been unable to realize internal savings that would allow it to
               shift staff to higher priority areas. Our review of IRS’s 2004 budget request,
               as well as its experience thus far in fiscal year 2003, raises questions about
               whether IRS will be able to achieve the proposed internal savings.
               According to IRS officials, four of the seven most significant efforts
               outlined in its 2004 budget request—in terms of staff years and dollars to
               be saved—will not achieve all of their projected savings because the
               projections were based on assumptions that will not be realized.

               Recent trends in the electronic filing program also have implications for
               IRS’s ability to shift resources to higher priority areas. The increase to an
               estimated 53 million returns represented the smallest percentage increase
               in the last 9 years. The current growth rate will not allow IRS to achieve its
               goal to have 80 percent of all tax returns filed electronically by 2007.
               Instead, based on current growth rates, IRS will achieve about 61 percent
               of all individual returns by 2007.

               This year, like every other year since the initiation of electronic filing, IRS
               has taken actions to alleviate impediments to electronic filing and
               encourage taxpayers to file electronically. IRS entered into an agreement
               with the Free File Alliance, a consortium of 17 tax preparation companies,
               to offer free on-line tax preparation and filing services for at least 60
               percent of all taxpayers. However, as of April 16, 2003, only about 2.7
               million taxpayers file via the Free File Alliance consortium, and IRS
               estimated that only about 1 million were new electronic filers. Slower
               growth in electronic filing will reduce IRS’s ability to shift resources out of
               paper return processing.


               IRS has come a long way from where it was in the mid-1990s. It is easy to
Concluding     lose sight of progress when it is gradual, but over the last 5 years, IRS has
Observations   significantly enhanced its management capabilities and has succeeded in
               improving service to taxpayers. This progress in modernizing was
               achieved with a consistent, sustained focus on certain fundamentals of
               good management, such as controls over systems acquisition, financial
               data, and performance measures.



               Page 27                                                           GAO-03-796T
           Looking forward, IRS will be challenged to meet the expectations of
           taxpayers and Congress. The same focus on management fundamentals
           that proved successful over the last 5 years should help the new
           Commissioner deal with these challenges.

           Mr. Chairman, this concludes my prepared statement. I would be happy to
           answer any questions.




(450209)
           Page 28                                                     GAO-03-796T
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