oversight

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)

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                       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.


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                    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




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                         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.




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                        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.




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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


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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