. . $ United States General Accounting Office Fact Sheet for the Chairman, Committee on the Budget, House of Representatives July 1990 BUDGET ISSUES Effects of the Fiscal Year 1990 Sequestration on the i Internal Revenue Service BE~ICTED-- Not to be released outside the General Accounting OfIke unless specifically approved by the Offxce of Congressional Relations. ,- ,_- ,.._ i’ GAO/GGD-904diFS g United States General Accounting Office Washington, D.C. 20548 General Government Division B-240240 July 30, 1990 The Honorable Leon Panetta Chairman, Committee on the Budget House of Representatives Dear Mr. Chairman: In your January 2, 1990, request, you asked us to study the effects of the fiscal year 1990 sequestration on the operations of the Department of Health and Human Services and four or five other federal depart- ments The Committee later requested that we include the Internal Rev- enue Service (IRS) as one of the other agencies. This fact sheet presents information on the sequestration at IRS and is one of a series of case studies responding to your request. IRSwas required to sequester $46 million of its original fiscal year 1990 appropriation of about $5.5 billion. IRS administers four sequestrable appropriation accounts; only two of them were sequestered. The Processing Tax Returns account was reduced by 1.3 percent, or about $25 million, and the Investigations, Collection, and Taxpayer Service account was reduced by 1.3 percent, or about $21 million. IRS’ remaining two account,s, Examination and Appeals and Salaries and Expenses, were unaffected because their fiscal year 1990 appropriations were below the post-sequester levels mandated under the sequestration. Even after the sequestration, IRS received about a 6 percent increase in obligational authority over fiscal year 1989. Despite this increase, IRS determined after the fiscal year began that it had about $463 million less than it needed to meet its operating requirements. The sequestration accounted for about 10 percent of that shortfall. IRS attributed the rest to unfunded increases in compensation and benefit costs, the need to absorb the 1990 general pay increase for federal employees, additional program funding needs, and a reduction of funds for IRS’ share of the federal government’s escalation of the war on drugs. IRS curtailed hirings and promotions, cut back support services, and reduced some programs in response to its total shortfall, not just in response to the sequestration. As a result, IRS could not isolate the impact of the sequestration from the impact of its overall shortfall. Treasury’s Office of Tax Analysis estimated that these cutbacks will result in a combined $700 million revenue loss in fiscal years 1990 and 1991. Page 1 GAO/GGD90.101FS FY 1990 Sequestration at IRS -~ ___- -~ B-240240 The Balanced Budget and Emergency Deficit Control Act of 1985, as Background amended by P.L. 100-l 19, establishes deficit targets leading toward a balanced, unified budget by fiscal year 1993. Each year, the Office of Management and Budget (OMR) is required to submit an initial report on August 25 and a final report on October 15 projecting the fiscal year deficit. If OMH projects a deficit in excess of the target amount plus $10 billion, the President must issue a sequcstcr order to reduce budgeted amounts sufficiently to reach the deficit target level. In its August and October reports, OMIl identifies the amount of the total reduction required to meet the year’s deficit target, the percentage reduction required in defense and nondefense accounts, and the sequester base’ and sequestration amount for each of those accounts. The 1985 act, as amended, set the fiscal year 1990 deficit target at $100 billion. The August, 1989 OMI3 report estimated a $116.2 billion deficit, exceeding the target by $16.2 billion; the October 1989 report slightly reduced the OVWdll estimate to $116.1 billion. Both reports would have required a sequestration of 4.3 percent in defense accounts and 5.3 per- cent in nondefense accounts subject to sequestration. Sequestration of this magnitude was never implemented, however, because of the enact- ment of the Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239). That act, approved on December 19, 1989. reduced the mandatory sequestration amount to 130/365 of the original $16.1 billion require- ment,. This change effectively reduced sequestration requirements to $5.7 billion, or 1.5 percent in defense accounts and 1.4 percent in nondefense accounts. OMH responded to this legislation with a “Revised Final Sequester Report.” published on December 27, 1989, that seques- tered the lower amounts. ITltimately, however, not all agency accounts were reduced by 1.5 or 1.4 percent because of rules that apply when the sequestration precedes approval of appropriation acts. When OMH issued its final sequester report on October 15, most agencies were operating under continuing budget resolutions. As required by law, therefore, OMR calculated the sequester base using fiscal year 1989 appropriation amounts adjusted upward for inflation and pay costs. If actual fiscal year 1990 appropria- tions differed from the sequester base, the percentage actually seques- tered varied. If, for txample, the agency’s actual appropriation for a Page 2 GAO/GGDSO-IOlFS FY IS90 Sequestration at IRS B-240240 particular account was less than the sequester base for that account minus the sequestration amount, the account was not to be sequestered. If the agency’s actual appropriation for an account was greater than the sequester base for that account, the account was to be reduced by the original sequestration amount. Agencies are not required to sequester more than the amount originally designated by OMB. As the Committee requested, our objectives were to identify (1) how IRS’ Objectives, Scope, and resources were reduced by the sequestration and (2) what impact the Methodology sequestration had on IRS’ ability to fulfill its mission. To determine how IRS resources were reduced by the sequestration, we analyzed data on IRS’ appropriation accounts that we obtained from OMB’S October 1989 sequester report, the Budget of the United States Government for fiscal year 1991, and IRS’ Finance Division. To identify the sequestration’s impact on IRS’ ability to carry out its mis- sion, we relied primarily on the results of prior work we did on the impact of IRS’ fiscal year 1990 funding shortfall. We testified on that work in March 1990, before the Oversight Subcommittee of the House Committee on Ways and Means.’ For that testimony, we gathered data from officials in three IRS regions and the Kational Office on the specific impacts of the shortfall on their 1990 operations. As agreed with the Committee, we did not verify agency statements regarding the seques- tration’s impact. IRS was required to sequester a total of $46 million from two of its four Only Two of IRS’ Four operating accounts, or 0.8 percent of the agency’s $5.5 billion fiscal year Sequestrable Accounts 1990 appropriation. ’ NS sequestered about $25 million from its Were Reduced Processing Tax Returns account and about $2 1 million from its Investi- gations, Collection, and Taxpayer Service account. The remaining two accounts, Salaries and Expenses and Examination and Appeals, were not sequestered because the final appropriations for those accounts fell below the amount of the sequester base minus the sequestration. IRS’ accounts and final sequestration amounts are discussed in appendix I. ‘IRS’ Budget Request for Fiscal Yrar 1991 and Status of the 1990 Tax Return Filing Season (GAO/T- G -, 0 26 Mar. 22. 1990) .‘The President’s budget for fecal year 1991 shows appropriations for six IRS accounts. Four were subJect to th? seqoestratlon, and two were exempt. The two exempt accounts, with appropriations lotalling $6 2 billion. fund I:arnvd Income Tax Credit payments and interest on refunds. Page 3 GAO/GGD9@1OlFS N 1990 Sequestration at IBS B-240240 Impact of the cent increase in obligational authority over fiscal year 1989. In spite of Sequestration Cannot that increase, IRS determined that it had about $463 million less than it Be Separated From the needed to meet its operating requirements. Ilnfunded increases in salary and benefit costs ($270.2 million) and the need to absorb the 1990 gen- Impact of IRS’ Total eral pay increase ($103.0 million) accounted for a much larger part of Fiscal Year 1990 IRS’ shortfall than did the sequestration ($46.2 million). A funding reduc- tion pursuant to P.L. 101-164 to support the government’s war on drugs Shortfall and management’s decision to spend additional funds on various activi- ties, such as the distribution of forms and publications and the processing of currency transaction reports, accounted for the rest of the shortfall. IRStook a series of cost cutting actions to cover its fiscal year 1990 shortfall. IRS continued a hiring freeze begun in fiscal year 1989, cur- tailed promotions, and cut back support services. IRS also made some program cuts that led to curtailed service to the public and others that, according to Treasury’s Office of Tax Analysis, were expected to reduce combined fiscal year 1990 and 199 1 revenues by $700 million. Because the sequestration accounted for only 10 percent of the total shortfall, IRS officials told us that they could not differentiate the impact of the sequestration on program results from the impact of other shortfall components. Appendix I gives more details on IRS’fiscal year 1990 shortfall. As requested by the Committee, we did not obtain written comments on this fact sheet from IRS or other interested parties. However, we dis- cussed the contents of this fact sheet with IRS officials, who agreed with the facts presented. As agreed with the Committee, unless you publicly announce the con- tents of this fact sheet earlier, we will not distribute it until 30 days from its date. At that time, we will send copies to the Director of the Office of Management and Budget, t,he Director of the Congressional Budget Office, and other interested parties. Copies will also be made available to others upon request. Fact sheets for the other departments selected for this study will be transmitted to you upon completion. Page 4 GAO/GGD-SO-101FS FY 1990 Sequestration at IRS B.240240 Major contributors to this fact sheet are listed in appendix II. If you or your staff have any questions, please call me at 2756407. Sincerely yours, Jennie S. Stathis Director, Tax Policy and Administration Issues Page 5 GAO/GGD-90.lOlF3 FY 1990 Sequestration at IRS Contents Letter Appendix I 8 Implementation and How IRS Sequestered Its Budget Accounts 8 Sequestration’s Impact on IRS Operations 8 Impact of Sequestration at IRS Appendix II 12 Major Contributors to This Fact Sheet Tables Table I. 1: IRS’ Appropriations and Sequestration 8 Amounts Table 1.2: IRS’ Obligational Authority for Fiscal Years 9 1988 to 1990 Table 1.3: IRS’ Fiscal Year 1990 Funding Shortfall 10 Abbreviations IRS Internal Revenue Service OMB Office of Management and Budget Page 6 GAO/GGLHlO-101FS FY 1960 Sequestration at IRS Page 7 GAO/GGB9@1OlFS FY 1999 Sequestration at IRS Appendix I Implementation and Impact of Sequestration at IRS As shown in table I. 1, IRS was required to sequester $46 million: about How IRS Sequestered $25 million, or 1.3 percent, of its Processing Tax Returns account and Its Budget Accounts about $21 million, or 1.3 percent, of its Investigations, Collection, and Taxpayer Service account. The reduction in these two accounts is actu- ally 1.3 percent rather than the 1.4 percent used in OMH’S sequester report because IRS’ appropriations were larger than the sequester base. According to sequestration rules, agencies arc not required to sequester more than the dollar amount designated in OMH’s report. The remaining two accounts were not sequestered because the actual appropriations for those accounts fell below the amount of the sequester base minus the sequestration. Table 1.1: IRS’ Appropriations and Sequestration Amounts Dollars m thousands - OMB Sequester Report Fiscal year 1990 budget actions Post- Fiscal year Actual Sequestration Sequester 1.4 percent sequestration 1990 adjusted sequestration as a percent of Account base sequestration amount appropriationa amount appropriation Salartes and expenses $90,431 $1,266 $89,165 $72,241 $0 0 Processmg tax returns 1,807,710 25,308 1 782,402 1,944,504 25,308 13 Exammatlon and appeals 2,009,730 28,136 1 981,594 1,907,813 0 0 lnvestlgations, collectlon, and taxpayer service 1,491,687 20,884 1 470,803 1622,953 20,884 13 Total $5,399,558 $75,594 $5,323,984 $5,547,511 $46,192 0.8 aPursuant to P L 101-164. about $2 4 million was resclnded from IRS’ fiscal year 1990 appropr~ai~ons before the sequestrat!on was implemented This fiscal year 1990 adjusted appropriation was used lo calculate the actual sequestration amount Sources Sequester base from OMB’s Rwsed Final Sequester Report flscal year 1990 appropnat~ons and actual sequestration amounts from the President’s fiscal year 1991 budget Even after the sequestration, IRS’ obligational authority for fiscal year Sequestration’s Impact 1990 was about 6 percent higher than in fiscal year 1989. Table I.2 on IRS Operations shows IRS’ obligational authority for fiscal years 1988 through 1990. Page R GAO/GGD90101W Fy 1990 Sequestration at IRS Apprndk I lmplemrntation and Impact of Sequestration at IRS Table 1.2: IRS’ Obligational Authority for Fiscal Years 1988 to 1990 Dollars I” thousands Percent change fiscal years Fiscal year 1988- 1989- 1988 1989 1990 1989 1990 Appropr~atlon amount $5,058,880 $5194,880 $5.549,938 27 68 Other obllgatlonal authority Offsetting collec!Ions 24,971 31,977 44,570 Llnobllgated balances 38,051 20,101 11,686 Transfers I” 01 (out) 0 (140) (1,557) -. Sequestration amount 0 0 (46,192) Other reducttons 0 0 (2,427) Total obligational authority $5,121,902 $5,246,818 $5,558,026 2.4 5.9 “P L 101 164 rescInded approximately $7 4 mullion from IRS‘ budget to help finance the government’s war on drugs and appropriated an addttlonal $5 mllllon to support IRS enforcement of federal tax law violations and money laundering related to illegal narcotics actlwty The net effect was a reduction of approximately $2 4 m1ll10n Source President s budgets tor 11scalyears 1990 and 1991 In spite of the increase m obligational authority, IRSexperienced a funding shortfall of $463 million in fiscal year 1990, as shown in table 1.3. Sequestration accounted for about 10 percent of the shortfall while increased labor costs a(-counted for 81 percent. Page 9 GAO/GGD-90.lOlIT FY 1990 Sequestration at IRS Appendix I Implementation and Impact of Sequestration at IRS Table 1.3: IRS’ Fiscal Year 1990 Funding Shortfall Dollars in mllllons Source of shortfall Amount Increased labor costs Increased salary costs ~~~~ $1965 ~~ Increased benefit costs 73 7 Absorbing 1990 pay increase 1030 Total $373 2 Sequestration 46 2 AddItIonal program needs Tax forms dlstnbuhon 119 Currency transactton reportmg 109 A-76 restorabon 81 Electronic fllmg 38 Internal audit 17 Total 36 4 Resclsslon for the war on drugs 7 4” Total shortfall $463.2 “As part of the same law that rescinded approximately $7 4 million, IRS recwed an addltlonal $5 mIllion That money was not available to help offset the shortfall because !I was lqslatlvely earmarked for IRS’ a&drug efforts Source IRS Finance D~ws~on In response to its funding shortfall, IRS did a significant amount of reprogramming and took a series of cost saving actions. For example, IRS reprogrammed funds from such areas as transportation, equipment, and supplies to compensation, benefits, and rent. In addition to reprogram- ming, IRS continued a hiring freeze begun in fiscal year 1989; limited pro- motions and posit,ion upgrades; cut back training, travel, and other support services; and reduced funds for information systems. Because of the hiring freeze, IRSdelayed implementing seven of the nine revenue initiatives that Congress authorized as part of IRS’ fiscal year 1990 budget. These revenue initiatives were intended to increase staff in IRS’ Examination, Collection, Appeals, and International programs. IRS Finance Division officials said the decisions to delay implementing the revenue initiatives and to continue the hiring freeze were directly linked to the costs associated with the sequestration and the absorption of the 1990 general pay increase. Treasury’s Office of Tax Analysis esti- mated that these two actions will result in a combined $700 million rev- enue loss over fiscal years 1990 and 199 1. Page 10 GAO/GGD+@lOlFS FY 1990 Sequestration at IRS Appendix I Implementation and Impact of Sequestration at IRS We discussed the impact of IRS’ total shortfall with officials in IRS’ National Office and Central, Midwest, and Western regions. Our inquiries showed that field offices had to eliminate all but the most essential training. For example, some officials t.old us that employees were not getting industry-specific, computer, and other technical training necessary to do their jobs effectively. We were also told that insufficient money to relocate employees left positions unfilled and that budget reductions hindered the acquisition and use of space and equipment. Funding shortages also led to some program adjustments. For example, IRS reduced the number of toll-free telephone lines, making it more diffi- cult for taxpayers to get through to IRS with their tax law questions during the 1990 filing season. This year, one out of three callers reached an assistor; the rest got a busy signal or hung up after being put on hold. Last year, two out of three callers reached an assistor. At the Kansas City Service Center. the shortfall contributed to delays in IRS’ responses to taxpayer correspondence. Service Center officials also told us about cutbacks in various service center compliance programs, including those that involve (I) the use of information returns to identify persons who have underreported their income and (2) the audit of simple issues through correspondence with the taxpayer. IKScompleted its mid-year financial review and released a new set of operating guidelines in April 1990. Subject to the availability of funds, these guidelines eased several of the cost controls placed on field and National Office operations. For example, available funds identified during the financial reviews can now be used to release promotion restrictions and the hiring freeze for clerical staff and to restore cuts made to taxpayer telephone service and t,he underreporter program. As IKS continues to monit.or its fiscal condition, it may add other cost con- trols or further relax those still in place. Page 11 GAO/GGD-90.lOIFS PY 1990 Sequestration at IRS Appendix II Major Contributors to This Fact Sheet David J. Attianese, Assistant Director, Tax Policy and Administration General Government Issues Division, Washington, William F. Bley, Evaluator-In-Charge D.C. Deborah Parker .Junod. Evaluator Edith A. Pyles, Assistant Director, Budget Systems and Practices Accounting and Barbara D. Bovbjerg, Pro,ject Manager Financial Management Division, Washington, D.C. (2684.55) Page 12 GAO/GGD-90.101FS F’Y 1990 Sequestration at IRS
Budget Issues: Effects of the Fiscal Year 1990 Sequestration on the Internal Revenue Service
Published by the Government Accountability Office on 1990-07-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)