oversight

High-Risk Series: IRS Management

Published by the Government Accountability Office on 1997-02-01.

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

                United States General Accounting Office

GAO             High-Risk Series




February 1997
                IRS Management




GAO/HR-97-8
GAO   United States
      General Accounting Office
      Washington, D.C. 20548

      Comptroller General
      of the United States



      February 1997
      The President of the Senate
      The Speaker of the House of Representatives

      In 1990, the General Accounting Office began a special
      effort to review and report on the federal program areas
      its work identified as high risk because of their
      vulnerability to waste, fraud, abuse, and mismanagement.
      This effort, which was supported by the Senate
      Committee on Governmental Affairs and the House
      Committee on Government Reform and Oversight,
      brought a much-needed focus on problems that were
      costing the government billions of dollars.

      In December 1992, GAO issued a series of reports on the
      fundamental causes of problems in high-risk areas, and in
      a second series in February 1995, it reported on the status
      of efforts to improve those areas. This, GAO’s third series
      of reports, provides the current status of designated
      high-risk areas.

      This report discusses four high-risk areas at the Internal
      Revenue Service involving (1) the multibillion dollar Tax
      Systems Modernization initiative, (2) substantial financial
      management weaknesses which diminish IRS’ ability to
      assess the results of operations or measure performance,
      (3) problems in the management and collection of billions
      of dollars in tax accounts receivable, and (4) significant
      levels of tax filing fraud. Congress has signaled its
      concern over these problems through its oversight and
funding decisions, and Treasury and IRS have made some
progress in addressing problems in each of these four
high-risk areas since our last high-risk report series.
However, IRS faces a number of significant challenges to
continuing this progress, particularly in its efforts to
modernize its operations. A sustained, agency-wide
commitment will be critical to resolving these serious
problems.

Copies of this report series are being sent to the
President, the congressional leadership, all other
Members of Congress, the Director of the Office of
Management and Budget, and the heads of major
departments and agencies.




James F. Hinchman
Acting Comptroller General
of the United States




            Page 2                GAO/HR-97-8 IRS Management
Page 3   GAO/HR-97-8 IRS Management
Contents



Overview                                           6

High-Risk Areas                                   12

Further Action                                    35
Needed
Related GAO                                       37
Products
1997 High-Risk                                    43
Series




                  Page 4   GAO/HR-97-8 IRS Management
Page 5   GAO/HR-97-8 IRS Management
Overview



           The Internal Revenue Service’s (IRS) mission
           is to collect the proper amount of tax
           revenue in a fair and efficient manner at the
           least cost to the public. For fiscal year 1995,
           IRS reported collecting $1.4 trillion from
           taxpayers, processing over a billion tax
           returns and related documents, disbursing
           $122 billion in tax refunds, and managing an
           estimated accounts receivable inventory of
           $113 billion. In addition, IRS administered a
           reported $400 billion in tax expenditures. To
           ensure its ability to efficiently and fairly
           administer the nation’s tax system, IRS has
           articulated a business vision for 2001. This
           vision calls for reducing the volume of paper
           returns, providing better customer service,
           and improving compliance by modernizing
           IRS’ operations.


           Since developing its business vision in 1992,
           IRS has made some progress in modernizing
           its operations; however, the gap between IRS’
           current level of performance and that
           proposed in its vision is great. Specifically,
           the efficient administration of the nation’s
           tax system is undermined by problems in
           four areas of IRS’ operations: tax systems
           modernization (TSM), financial management,
           accounts receivable, and filing fraud. These
           four areas were identified in our 1995
           High-Risk Series as being especially


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              Overview




              vulnerable to waste, fraud, abuse, and
              mismanagement.1 Improvements have been
              made, but these areas continue to have
              problems that warrant their inclusion in our
              1997 High-Risk Series.


The Problem   IRSis an agency trying to respond to the
              demands of the 1990s with 1950s processes
              and 1970s technology. For years we have
              chronicled IRS’ struggle to modernize and
              manage its operations, especially in the four
              high-risk areas, and have made scores of
              recommendations to improve IRS’ systems,
              processes, and procedures. Without
              successfully modernizing operations in the
              high-risk areas, IRS is unlikely to achieve the
              goals in its business vision.

              A key factor for explaining IRS’ difficulties in
              the high-risk areas is its lack of a
              comprehensive implementation strategy or
              detailed business plan for modernization.
              Such a strategy would guide IRS in setting
              priorities, changing internal management
              and administrative processes, developing
              necessary in-house technical skills, and
              acquiring relevant technology. To be
              successful, this strategy should include
              performance measures that could be used by

              1
               GAO/HR-95-20SET.

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           Overview




           Congress, the Department of the Treasury
           (Treasury), and IRS to track IRS’ progress in
           accomplishing its vision.

           The problems IRS confronts in attempting to
           eliminate its high-risk vulnerabilities are
           compounded by their interdependencies.
           Specifically, IRS’ success in addressing its
           financial management, accounts receivable,
           and filing fraud vulnerabilities is linked to its
           success in modernizing its information
           systems. IRS’ processes and systems were not
           designed to address the critical needs and
           vulnerabilities that IRS confronts today.
           These processes and systems must be
           modernized to support IRS’ business vision
           and to address its high-risk areas. However,
           until clearly defined business requirements
           drive IRS’ modernization efforts, there is no
           assurance that these efforts will achieve IRS’
           vision or improve its operations.


Progress   IRShas made some progress in addressing
           the problems we have identified in the four
           high-risk areas. For example, IRS is finalizing
           a comprehensive strategy to maximize
           electronic filing and has begun initiatives to
           develop a complete integrated systems
           architecture. In response to our
           recommendations, IRS has also begun to plan


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                  Overview




                  both short-term and long-term solutions to
                  its financial management problems, has
                  implemented a new administrative
                  accounting system, and has transferred its
                  payroll processing to the Department of
                  Agriculture’s National Finance Center.

                  In dealing with its accounts receivable
                  problems, IRS has streamlined selected
                  notification and collection processes and is
                  developing ways to adjust its collection
                  techniques to address the various
                  characteristics of delinquent taxpayers. IRS’
                  effort to further prevent and deter the filing
                  of fraudulent tax returns has involved
                  increasing the electronic filters and manual
                  checks to (1) screen electronic and paper
                  returns for problems, (2) determine the
                  suitability of those who want to serve as
                  preparers or transmitters of electronic
                  returns, and (3) better identify questionable
                  refund claims.


Outlook for the   While we are encouraged by IRS’ and
Future            Treasury’s actions, we remain concerned
                  because continued progress is needed to
                  fully implement essential improvements.
                  This is particularly true of IRS’ modernization
                  efforts because of their key role in resolving
                  the other issues, such as the problems


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Overview




identified in IRS’ revenue accounting systems.
At the same time, the nation’s tax debt
inventory will continue to grow, and filing
fraud will continue to be a concern. Until IRS
sustains an agencywide commitment and
devotes the necessary management attention
to addressing the challenges it faces in
modernizing its processes and systems, it
cannot hope to solve its high-risk problems.

Recent increased oversight of IRS reflects the
broad-based concern over these issues.
Congress has signaled its concern over IRS’
slow progress in modernizing its processes
and systems by (1) cutting IRS’ budget
requests for funds to support its
modernization efforts, (2) withholding
additional modernization funding until IRS
successfully addresses certain identified
problems, and (3) directing Treasury to
assess and report on IRS’ progress in taking
corrective action. Likewise, Treasury has
attempted to assist in IRS’ overall
modernization planning and decision-making
by directing IRS to rely more heavily on the
technical expertise of outside contractors
and by establishing a review board to
monitor IRS’ information technology
investments.




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Overview




In addition, Congress established the
National Commission on Restructuring IRS
and gave the Commission a broad charter for
reviewing IRS’ management and operations.




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High-Risk Areas



                The four areas in IRS that we have deemed
                high risk require comprehensive business
                strategies to ensure that IRS’ new and revised
                processes drive systems development and
                acquisition. These areas also require
                accurate and reliable information systems
                and performance measures to track IRS’
                progress and provide the data necessary to
                make informed management decisions.


Tax Systems     Over the last decade, IRS has been attempting
Modernization   to overhaul its timeworn, paper-intensive
                approach to tax return processing. In 1995,
                we identified serious management and
                technical weaknesses in the modernization
                program that jeopardize its successful
                completion, recommended many actions to
                fix the problems, and added IRS’
                modernization to our high-risk list. Since
                then, IRS and Treasury have together taken
                several steps to implement our
                recommendations, but much remains to be
                done. At stake is the over $3 billion that IRS
                has spent or obligated on this modernization
                since 1986, as well as any additional funds
                that IRS plans to spend on modernization.

                In July 1995, we reported that IRS (1) did not
                have a comprehensive business strategy to
                cost-effectively reduce paper tax return


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High-Risk Areas




filings and (2) had not yet fully developed
and put in place the requisite management,
software development, and technical
infrastructure necessary to successfully
implement its ambitious, world-class
modernization. We also reported that IRS
lacked an overall systems architecture, or
blueprint, to guide the modernization’s
development and evolution.

At that time, we made over a dozen
recommendations to the IRS Commissioner
to address these weaknesses. Collectively,
the recommendations called for IRS to
(1) formulate a comprehensive business
strategy for maximizing electronic filings,
(2) improve its strategic information
management by implementing a process for
selecting, prioritizing, controlling, and
evaluating the progress and performance of
all major information systems and
investments, (3) implement disciplined,
consistent procedures for software
requirements management, quality
assurance, configuration management, and
project planning and tracking, and
(4) complete and enforce an integrated
systems architecture and security and data
architectures. IRS agreed to implement our
recommendations.



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High-Risk Areas




In May 1996, Treasury reported to the House
and Senate Appropriations Committees on
steps under way and planned to exert
greater management oversight over IRS’
modernization efforts.1 For example, it
established a Modernization Management
Board as the primary review and
decision-making body for modernization and
for policy and strategic direction. In
addition, Treasury scaled back the overall
size of the modernization by approximately
$2 billion and is working with IRS to obtain
additional contractor help to accomplish the
modernization.

Pursuant to congressional direction, we
assessed IRS’ actions to correct its
management and technical weaknesses, as
delineated in Treasury’s report on tax
systems modernization. We reported in June
and September 1996 that IRS had initiated
many activities to improve its modernization
efforts but had not yet fully implemented any
of our recommendations. Consequently, in
order to minimize the risk attached to
continued investment in its systems
modernization, we suggested to Congress
that it consider limiting modernization
funding exclusively to cost-effective efforts

1
Report to House and Senate Appropriations Committees: Progress
Report on IRS’s Management and Implementation of Tax Systems
Modernization, Department of the Treasury, May 6, 1996.

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High-Risk Areas




that (1) support ongoing operations and
maintenance, (2) correct IRS’ pervasive
management and technical weaknesses,
(3) are small, represent low technical risk,
and can be delivered quickly, and (4) involve
deploying already developed and fully tested
systems that have proven business value and
are not premature given the lack of a
completed architecture.

To help oversee IRS’ modernization, Congress
in the fiscal year 1997 Omnibus Consolidated
Appropriations Act2 directed IRS to
(1) submit by December 1, 1996, a schedule
for transferring a majority of its
modernization development and deployment
to contractors by July 31, 1997, and
(2) establish a schedule by February 1, 1997,
for implementing our recommendations by
October 1, 1997. In its conference report on
the act, Congress directed the Secretary of
the Treasury to (1) provide quarterly reports
on the status of IRS’ corrective actions and
modernization spending3 and (2) submit by
May 15, 1997, a technical architecture for the
modernization that has been approved by

2
 Public Law 104-208, September 30, 1996.
3
 H.R. Report No. 863, 104th Cong., 2d sess. (1996). Congress also
included the requirement that Treasury provide a milestone
schedule for developing and implementing all modernization
projects in Treasury’s fiscal year 1996 appropriations act (Public
Law 104-52, Nov. 19, 1995).

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High-Risk Areas




Treasury’s Modernization Management
Board. Additionally, the Board was directed
to prepare a request for proposals by July 31,
1997, to acquire a prime contractor to
manage modernization deployment and
implementation.

IRShas continued to take steps to address
our recommendations and respond to
congressional direction. For example, IRS
hired a new Chief Information Officer. It also
created an investment review board to
select, control, and evaluate its information
technology investments. Thus far, the board
has reevaluated and terminated selected
major modernization development projects,
such as the Document Processing System
(DPS).

Additionally, IRS (1) provided a November 26,
1996, report to the Congress that set forth
IRS’ strategic plan and schedule for shifting
modernization development and deployment
to contractors, (2) is finalizing a
comprehensive strategy to maximize
electronic filing that is scheduled for
completion in early 1997, and (3) is updating
its system development life cycle
methodology and working across various IRS
organizations to define disciplined processes
for software requirements management,


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High-Risk Areas




quality assurance, configuration
management, and project planning and
tracking. Additionally, IRS is developing a
technical architecture for the modernization
and plans to provide this to Congress by May
15, 1997. Further, IRS is preparing a schedule
for implementing our recommendations and
plans to provide it to Congress in
February 1997.

While we recognize IRS’ and Treasury’s
actions to address these problems, we
remain concerned. Much remains to be done
to fully implement essential improvements.
Increasing the use of contractors, for
example, will not automatically increase the
likelihood of successful modernization
because IRS does not have the technical
capability needed to manage all of its current
contractors. As a case in point, IRS’
Cyberfile—a system development effort led
by contractors to enable taxpayers to
personally prepare and file their tax returns
electronically—exhibited many
undisciplined software acquisition practices
as well as inadequate financial and
management controls. Eventually, IRS
canceled the Cyberfile project after spending
over $17 million and without fielding any of
the system’s promised capabilities.
Therefore, if IRS is to use additional


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             High-Risk Areas




             contractors effectively, it will have to first
             strengthen and improve its ability to manage
             those contractors.

             In addition, IRS needs to continue to make
             concerted, sustained efforts to fully
             implement our recommendations and
             respond effectively to the requirements
             outlined by Congress. It will take both
             management commitment and technical
             discipline for IRS to do this effectively.
             Accordingly, we plan to continue assessing
             IRS’ progress in its critical endeavor to
             modernize.


Financial    Our audits of IRS’ financial statements have
Management   outlined the substantial improvements
             needed in IRS’ accounting and reporting in
             order to comply fully with the requirements
             of the Chief Financial Officers Act of 1990
             (CFO Act). The audits for fiscal years 1992
             through 1995 have described IRS’ difficulties
             in properly accounting for its reported $1.4
             trillion in tax revenues, in total and by
             reported type of tax; reliably determining the
             amount of accounts receivable owed for
             unpaid taxes; regularly reconciling its Fund
             Balance With Treasury accounts; and either
             routinely providing support for receipt of the
             goods and services it purchases or, where


             Page 18                GAO/HR-97-8 IRS Management
High-Risk Areas




supported, accurately recording the
purchased item in the proper period.

IRS has made progress in addressing these
problems and has developed an action plan,
with specific timetables and deliverables, to
address the issues our financial statement
audits have identified. This is particularly
notable in IRS’ administrative accounting
operations, which track its over $7 billion
appropriation that funds IRS’ activities. For
example, IRS recently reported that it has
identified substantially all of the reconciling
items for its Fund Balance With Treasury
accounts, except for certain amounts IRS has
deemed not to be cost-beneficial to research
further. It also has successfully transferred
its payroll processing to the Department of
Agriculture’s National Finance Center and
has begun designing both a short-term and a
long-term strategy to fix the problems that
contribute to its nonpayroll expenses being
unsupported or reported in the wrong
period.

Further, in the revenue accounting area, IRS
has designed an interim approach to capture
the detailed support for revenue and
accounts receivable until longer-term
solutions can be identified and implemented.
The issues with IRS’ revenue accounting


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    High-Risk Areas




    operations are complex, and the remedies
    needed are multifaceted and encompass
    organizational, managerial, technological,
    and procedural improvements. IRS’ revenue
    accounting problems are especially affected
    and complicated by automated data
    processing systems that were implemented
    many years ago and thus not designed to
    support the financial reporting requirements
    ushered in by the CFO Act. Some of the
    longer-term actions needed to correct the
    long-standing problems in IRS’ revenue
    accounting operations include

•   implementing software, hardware, and
    procedural changes needed to create reliable
    subsidiary accounts receivable and revenue
    records that are fully integrated with the
    general ledger; and
•   implementing software changes that allow
    the detailed taxes reported to be maintained
    separately from the results of compliance
    efforts that would not be valid financial
    reporting transactions in the masterfile,
    other related revenue accounting feeder
    systems, and the general ledger.

    The requirements of the CFO Act have
    provided the impetus for ongoing efforts to
    improve IRS’ operations. They led to IRS’ top
    managers having a much better


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High-Risk Areas




understanding than ever before of IRS’
serious accounting and reporting problems,
provided information on the magnitude of
IRS’ tax receivables collection problems, and
identified the need for stronger controls over
such areas as payroll operations.

IRS has made progress in responding to our
recommendations. Over the past 4 years, we
have made 59 recommendations to improve
IRS’ financial management systems and
reporting. IRS agreed with these
recommendations and has been working to
implement them and correct its financial
systems and information problems. IRS has
completed action on some of these
recommendations and has efforts under way
to address the remaining areas. IRS has been
directed in the appropriations committees’
conference report to submit a report by
March 1, 1997, that presents a plan to correct
the problems identified in our July 1996
audit report. As part of our audit of IRS’ fiscal
year 1996 financial statements, which was
ongoing when this report was being
prepared, we are examining and will report
on the additional actions IRS has taken to
respond to the recommendations we have
made.




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High-Risk Areas




IRS’efforts are intended to position itself to
have more reliable financial statements for
fiscal year 1997 and thereafter. To
accomplish this, especially in accounting for
revenue and the related accounts
receivables, IRS will need to institute
longer-term solutions involving
reprogramming software for IRS’ antiquated
systems and developing new systems as
required.

Follow-through by IRS is essential to ensure
that its short-term and long-term plans are
carried out and effectively solve financial
management problems. While IRS’ senior
management has resolved to address these
issues, in the past IRS has not always
provided the follow-through needed to
complete necessary corrective measures.
Solving these problems is essential to
providing reliable financial information and
ensuring taxpayers that their federal tax
dollars are properly accounted for in
accordance with federal accounting
standards. The accuracy of IRS’ financial
statements is also essential to both IRS and
Congress for (1) ensuring adequate
accountability for IRS programs, (2) assessing
the impact of tax policies, and (3) measuring
IRS’ performance and cost effectiveness in




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             High-Risk Areas




             carrying out its numerous tax enforcement,
             customer service, and collection activities.


Accounts     IRS is the government’s primary tax
Receivable   collection agency and routinely collects over
             a trillion dollars annually. But many
             taxpayers are either unable or unwilling to
             pay their taxes when due, and as a result, IRS
             estimates that its accounts receivable
             amount to tens of billions of dollars.
             Unfortunately, IRS’ long-term efforts to
             efficiently and effectively collect the billions
             of dollars taxpayers owe in delinquent taxes
             and to prevent taxpayers from becoming
             delinquent have been seriously hampered,
             primarily by outdated equipment and
             processes, incomplete information needed to
             better target collection efforts, and the
             absence of a comprehensive strategy and
             detailed plan that address the systemic
             nature of the underlying problems.

             On the other hand, short-term results in
             collecting delinquent taxes have shown
             some promise. In fiscal year 1996, for
             example, IRS reported the collection of
             $29.8 billion in delinquent taxes—the most
             ever by IRS. Furthermore, for the first time
             since 1989, IRS also reported that its
             collection employees took in more money


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High-Risk Areas




than they classified as “currently not
collectible.” While these results are
encouraging, IRS needs to know more about
its inventory of tax assessments and the
types of taxpayers who become delinquent
each year to develop effective strategies to
efficiently target its collection resources and
to prevent future delinquencies.

IRS’ collection efforts have been hampered by
the age of the delinquent tax accounts.
Because of the outdated equipment and
processes used to match tax returns and
related information documents, it can take
IRS several years to identify potential
delinquencies and then initiate collection
actions. In addition, according to IRS, the
10-year statutory collection period generally
precludes it from writing off uncollectible
receivables until that period has expired. As
a result, the receivables inventory includes
many relatively old accounts that will never
be collected because the taxpayers are
deceased or the companies defunct.

IRS has undertaken many initiatives to deal
with its accounts receivable problems. These
initiatives include correcting errors in the
masterfile records of tax receivables,
developing more information on the makeup
of the inventory of tax debts, developing


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High-Risk Areas




research systems to identify characteristics
of delinquent taxpayers and appropriate
collection techniques, attempting telephone
contact earlier in the collection process,
speeding up the collection process for repeat
delinquents, revising the format of bills sent
to delinquent taxpayers, automating many of
the processes carried out by collection
employees in field offices, and attempting to
collect compliance-generated delinquencies
earlier. While some of these efforts appear to
have had some impact on collections and the
tax debt inventory, others are long term in
nature, and their effectiveness may not be
determined for years. Further, the problems
with IRS’ data and information systems will
continue to hinder its ability to effectively
measure the results of these efforts.

Congress has recently taken actions that
could help deal with the collection of
delinquent taxes and the prevention of future
delinquencies. Legislation requiring more
electronic deposits of employment taxes,
expanding voluntary withholding, and
authorizing IRS to test the use of private debt
collectors could help reduce posting errors,
prevent taxpayers from becoming
delinquent, and collect more money. Other
actions in areas such as tax delinquencies
related to independent contractors—a group


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High-Risk Areas




of taxpayers that is proportionately more
delinquent than other groups of
taxpayers—could, if adopted, also help IRS
deal with its collection problems.

Although the results cannot generally be
quantified or traced back to specific actions
or improvements, some of IRS’ efforts
reportedly have resulted in increased
collections and reduced delinquencies in the
short term. For example, during fiscal year
1996, IRS revised the bills sent to taxpayers to
make them clearer and easier to understand,
and reported that collections from the billing
process increased from $11.8 billion in fiscal
year 1995 to $14.7 billion in fiscal year 1996.
IRS has also placed more emphasis on
collecting examination assessments at the
close of an audit, and preliminary results
have been favorable.

Until fiscal year 1996, IRS’ inventory of tax
assessments increased at a faster pace than
collections. For example, during the period
1991-1996, the inventory increased an
average of 16 percent each year, from
$104 billion at the end of fiscal year 1991 to
about $216 billion at the end of fiscal year
1996. Reported collection of delinquent
taxes, however, averaged only a 4.5-percent



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increase, from $24.3 billion to $29.8 billion,
during that same period.

We recognize that the growth in the gross
inventory is not the best measure of IRS’
performance because it includes penalty and
interest charges that continue to accrue on
delinquent accounts, potentially invalid
accounts, and accounts that are truly
uncollectible; however, better figures are not
available. IRS is working toward better
defining its receivables inventory. For its
fiscal year 1995 financial statements, IRS
developed a methodology to differentiate
financial accounts receivable from the
amounts it has assessed for compliance
purposes. While the methodology appeared
sound, mistakes in performing the analysis
and errors in the underlying data made the
sample results unreliable.

A number of IRS initiatives hold some
potential for future improvements in both
collections and compliance. For example, IRS
is developing a number of research and
evaluative tools that are intended to
determine the most efficient and effective
way to handle cases by identifying those
taxpayer characteristics that could predict
the possible outcome of the cases. In
addition, research databases are being


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High-Risk Areas




constructed that are intended to allow for
identification of particular groups, and a
research structure has been developed to
allow for studies dealing with different
groups of taxpayers. However, the
completion dates for full development of the
databases are currently unknown due to the
uncertainty of funding for IRS’ Tax Systems
Modernization program. Even if funding was
assured, it would still take a number of years
to identify the root causes of delinquencies
and to develop, test, and implement courses
of action to deal with the causes. Once the
analyses and planning are completed, it will
still be some time before full results of the
new initiatives are realized.

Nevertheless, the recent increase in reported
collections is a good sign. As previously
mentioned, the $29.8 billion reported in
fiscal year 1996 is the most ever collected.
This sum represents a 19-percent increase
over the $25.1 billion reported in fiscal year
1995 and a 17-percent increase over the
$25.5 billion reported in fiscal year
1990—the previous best year. However, as
we said earlier, IRS does not have the data to
determine which actions or improvements
generate changes in program performance
such as this.



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               High-Risk Areas




               Correcting the problems and improving
               collections will require long-term and
               continuous efforts. To ensure that these
               efforts are on the right track, IRS needs a
               comprehensive strategy that involves all
               aspects of IRS’ operations. As part of this
               strategy, IRS needs to set priorities;
               modernize outdated equipment and
               processes; and establish goals, timetables,
               and a system to measure progress.


Filing Fraud   When we first identified filing fraud as a
               high-risk area in February 1995, the amount
               of filing fraud being detected by IRS was on
               an upward spiral. From 1991 to 1994, the
               number of fraudulent returns that IRS
               detected rose from 11,168 to 77,781, and the
               total amount of fraudulent refunds detected
               rose from $42.9 million to $160.5 million. In
               1995, after being urged to take immediate
               action by us, Congress, and a Treasury task
               force, IRS introduced new controls and
               expanded existing controls in an attempt to
               reduce its exposure to filing fraud. Those
               controls were directed toward either
               (1) deterring the filing of fraudulent returns
               or (2) identifying questionable returns after
               they have been filed.




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To deter the filing of fraudulent returns, IRS
took several steps that were focused on
electronic filers. As a result of these steps,
IRS (1) expanded the number of upfront
filters in the electronic filing system
designed to screen electronic submissions
for problems, such as missing or incorrect
Social Security Numbers (SSN), to prevent
returns with those problems from being filed
electronically and (2) strengthened the
process for checking the suitability of
persons applying to participate in the
electronic filing program as return preparers
or transmitters by requiring fingerprint and
credit checks.

To better identify fraudulent returns once
they have been filed, IRS placed an increased
emphasis in 1995 on validating SSNs on filed
paper returns and delayed any related
refunds to allow time to do those validations
and to check for possible fraud. IRS also
improved its Questionable Refund Program
by (1) revising the computerized formulas
used to score all tax returns as to their fraud
potential and (2) upgrading the Electronic
Fraud Detection System (EFDS) to give staff
better research capabilities.

IRS’
   efforts produced some positive results.
For example, the number of SSN problems


Page 30                GAO/HR-97-8 IRS Management
High-Risk Areas




identified by the electronic filing filters
increased from about 1 million in 1994 to
about 4.1 million in 1995. In addition, about
350 persons who applied to participate in the
electronic filing program for 1995 were
rejected because they failed the new
fingerprint and credit checks. IRS’ efforts to
validate SSNs on paper returns produced over
$800 million in reduced refunds or additional
taxes. Unfortunately, IRS identified many
more SSN problems than it was able to deal
with and released about 2 million refunds
without resolving the problems.

Despite the generally positive results, there
is insufficient information available to
determine which of IRS’ actions have had a
significant impact on either detecting or
deterring filing fraud. IRS conducted some
studies in 1995 and 1996 that may shed some
light on the effects of its changes and
upgrades, but IRS has not released the results
of these studies.

The number of fraudulent returns identified
by IRS has declined recently, from 77,781
fraudulent returns involving refunds of
$160.5 million in 1994 to 62,309 fraudulent
returns with refunds of $131.7 million in
1995. That downward trend continued in
1996, at an even more significant pace.


Page 31                GAO/HR-97-8 IRS Management
High-Risk Areas




During the first 9 months of 1996, IRS
reported detecting 20,521 fraudulent returns
involving refunds of $55.4 million, compared
with 59,241 returns totaling $124.8 million in
the first 9 months of 1995. There is
insufficient information available to
determine whether the decline was the result
of staff reductions, changes in the program’s
operating and reporting procedures, or a
general decline in the incidence of fraud.

IRS’efforts to control filing fraud are also
constrained by the relatively short time
available, after a return is filed and before
any refund is issued, in which to identify a
questionable return. Therefore, it is critically
important for IRS to (1) optimize the controls,
such as upfront filters, that are intended to
prevent the filing of fraudulent returns and
(2) maximize the effectiveness of available
staff. Modernization is the key to achieving
these objectives, and electronic filing is the
cornerstone of that modernization.

As discussed previously, one of the benefits
of electronic filing is the ability to build
controls into the system, in the form of
filters, that prevent returns with certain
problems (such as incorrect SSNs) from being
filed electronically. IRS cannot identify those
kinds of problems on paper returns until


Page 32                 GAO/HR-97-8 IRS Management
High-Risk Areas




after the returns are filed and, as happened
in 1995, is limited in the number of cases it
can pursue by the number of staff available.
One solution to this dilemma is to increase
the percentage of returns filed electronically.
IRS’ business vision calls for increasing the
number of electronic returns to 80 million by
2001. However, our analysis of recent filing
trends indicated that only about 33 million
returns are expected to be filed
electronically by 2001. To achieve its goal,
IRS must first identify those groups of
taxpayers who offer the greatest opportunity
to reduce IRS’ paper-processing workload
and operating costs if they were to file
electronically. IRS must then develop
strategies that focus its resources on
eliminating or lessening impediments that
inhibit those groups from participating in the
program. As of early January 1997, IRS was
finalizing its electronic filing strategy.

The EFDS enables IRS to use its staff more
effectively by automating a process that had
been labor and paper intensive and by
enhancing the staff’s research and query
capabilities. To date, EFDS has been used
primarily on electronic returns, which
accounted for only about 13 percent of all
individual income tax returns filed in 1996.
IRS had planned to expand EFDS to all paper



Page 33                GAO/HR-97-8 IRS Management
High-Risk Areas




returns, but it is unclear how those plans will
be affected by IRS’ recent decisions to
terminate its major paper processing
modernization project (the Document
Processing System) and to consider other
options for processing paper returns.




Page 34                GAO/HR-97-8 IRS Management
Further Action Needed



            For years, IRS has struggled to collect the
            nation’s tax revenue using outdated
            processes and technology. The result has
            often been inefficient and ineffective
            programs and operations that are vulnerable
            to waste, fraud, abuse, and mismanagement.
            Of particular concern to us, Congress, and
            others have been IRS’ efforts to modernize its
            tax systems, manage its administrative and
            revenue accounting systems, identify and
            collect taxes owed the government, and
            detect and prevent the filing of fraudulent
            tax returns.

            These areas of concern share common
            characteristics that IRS must address in the
            very near future. Specifically, these high-risk
            areas lack an overall implementation
            strategy to guide IRS in the selection,
            acquisition, control, integration, security,
            and evaluation of modern information
            systems that would improve its efficiency
            and effectiveness. Program officials in these
            areas also do not always have the
            information needed for their management
            decisions. As a result, any expectation of
            significant and immediate improvement in
            these areas seems unrealistic.

            We believe that IRS must take prompt and
            determined action to identify and meet its


            Page 35                GAO/HR-97-8 IRS Management
Further Action Needed




planning, modernization, and information
needs. At a minimum, IRS needs an
implementation strategy that includes both
performing cost-benefit analyses when
prioritizing its needs in the context of its
overall business vision and developing
reasonable estimates of the extent, time
frames, and resources required to align its
program areas with its vision. IRS also needs
to better plan for the purchase and
integration of new systems and technologies.
In addition, IRS must ensure that its
administrative and revenue accounting
systems fully comply with government
accounting standards and that it develops
performance measures that will allow its
managers, Congress, and us to track its
progress.




Page 36                 GAO/HR-97-8 IRS Management
Related GAO Products



Tax Systems     Tax Systems Modernization: Actions
Modernization   Underway But Management and Technical
                Weaknesses Not Yet Corrected
                (GAO/T-AIMD-96-165, Sept. 10, 1996).

                IRSOperations: Critical Need to Continue
                Improving Core Business Practices
                (GAO/T-AIMD-96-188, Sept. 10, 1996).

                Internal Revenue Service: Business
                Operations Need Continued Improvement
                (GAO/AIMD/GGD-96-152, Sept. 9, 1996).

                Tax Systems Modernization: Cyberfile
                Project Was Poorly Planned and Managed
                (GAO/AIMD-96-140, Aug. 29, 1996).

                Tax Systems Modernization: Actions
                Underway But IRS Has Not Yet Corrected
                Management and Technical Weaknesses
                (GAO/AIMD-96-106, June 7, 1996).

                Security Weaknesses at IRS’ Cyberfile Data
                Center (GAO/AIMD-96-85R, May 9, 1996).

                Tax Systems Modernization: Management
                and Technical Weaknesses Must Be
                Overcome to Achieve Success
                (GAO/T-AIMD-96-75, Mar. 26, 1996).




                Page 37               GAO/HR-97-8 IRS Management
             Related GAO Products




             Tax Systems Modernization: Management
             and Technical Weaknesses Must Be
             Corrected If Modernization Is to Succeed
             (GAO/AIMD-95-156, July 26, 1995).


Financial    Financial Management: Challenges Facing
Management   the IRS (GAO/T-AIMD-97-34, Jan. 9, 1997).

             IRSFinancial Audits: Status of Efforts to
             Resolve Financial Management Weaknesses
             (GAO/T-AIMD-96-170, Sept. 19, 1996).

             Financial Audit: Examination of IRS’ Fiscal
             Year 1995 Financial Statements
             (GAO/AIMD-96-101, July 11, 1996).

             Financial Audit: Actions Needed to Improve
             IRS Financial Management (GAO/T-AIMD-96-96,
             June 6, 1996).

             IRSOperations: Significant Challenges in
             Financial Management and Systems
             Modernization (GAO/T-AIMD-96-56, Mar. 6, 1996).

             Financial Audit: Examination of IRS’ Fiscal
             Year 1994 Financial Statements
             (GAO/AIMD-95-141, Aug. 4, 1995).




             Page 38                GAO/HR-97-8 IRS Management
             Related GAO Products




             Financial Audit: Examination of IRS’ Fiscal
             Year 1993 Financial Statements
             (GAO/AIMD-94-120, June 15, 1994).

             Financial Audit: Examination of IRS’ Fiscal
             Year 1992 Financial Statements
             (GAO/AIMD-93-2, June 30, 1993).


Accounts     IRSTax Collection Reengineering
Receivable   (GAO/GGD-96-161R, Sept. 24, 1996).

             Tax Administration: Tax Compliance of
             Nonwage Earners (GAO/GGD-96-165, Aug. 28,
             1996).

             Managing IRS: IRS Needs to Continue
             Improving Operations and Service
             (GAO/T-GGD/AIMD-96-170, July 29, 1996).

             Financial Audit: Examination of IRS’ Fiscal
             Year 1995 Financial Statements
             (GAO/AIMD-96-101, July 11, 1996).

             Tax Research: IRS Has Made Progress But
             Major Challenges Remain (GAO/GGD-96-109,
             June 5, 1996).

             Tax Administration: IRS Tax Debt Collection
             Practices (GAO/T-GGD-96-112, Apr. 25, 1996).



             Page 39                 GAO/HR-97-8 IRS Management
Related GAO Products




Tax Administration: IRS’ Fiscal Year 1996 and
1997 Budget Issues and the 1996 Filing
Season (GAO/T-GGD-96-99, Mar. 28, 1996).

Status of Tax Systems Modernization, Tax
Delinquencies, and the Potential for
Return-Free Filing (GAO/T-GGD/AIMD-96-88,
Mar. 14, 1996).

Financial Audit: Examination of IRS’ Fiscal
Year 1994 Financial Statements
(GAO/AIMD-95-141, Aug. 4, 1995).

Taxpayer Compliance: Reducing the Income
Tax Gap (GAO/T-GGD-95-176, June 6, 1995).

Reducing the Tax Gap: Results of a
GAO-Sponsored Symposium (GAO/GGD-95-157,
June 2, 1995).

Tax Administration: Administrative
Improvements Possible in IRS’ Installment
Agreement Program (GAO/GGD-95-137, May 2,
1995).

High-Risk Series: Internal Revenue Service
Receivables (GAO/HR-95-6, Feb. 1995).

Tax Administration: Tax Compliance
Initiatives and Delinquent Taxes
(GAO/T-GGD-95-74, Feb. 1, 1995).


Page 40                GAO/HR-97-8 IRS Management
               Related GAO Products




               Tax Administration: Changes Needed to
               Reduce Volume and Improve Processing of
               Undeliverable Mail (GAO/GGD-95-44, Dec. 7,
               1994).

               Financial Audit: Examination of IRS’ Fiscal
               Year 1993 Financial Statements
               (GAO/AIMD-94-120, June 15, 1994).


Filing Fraud   Earned Income Credit: IRS’ 1995 Controls
               Stopped Some Noncompliance, But Not
               Without Problems (GAO/GGD-96-172, Sept. 18,
               1996).

               IRS Efforts to Control Fraud (GAO/GGD-96-96R,
               Mar. 25, 1996).

               The 1995 Tax Filing Season: IRS Performance
               Indicators Provide Incomplete Information
               About Some Problems (GAO/GGD-96-48, Dec. 29,
               1995).

               Tax Administration: Electronic Filing Falling
               Short of Expectations (GAO/GGD-96-12, Oct. 31,
               1995).

               Tax Administration: Continuing Problems
               Affect Otherwise Successful 1994 Filing
               Season (GAO/GGD-95-5, Oct. 7, 1994).



               Page 41                GAO/HR-97-8 IRS Management
Related GAO Products




Tax Administration: Electronic Filing Fraud
(GAO/T-GGD-94-89, Feb. 10, 1994).

Tax Administration: Increased Fraud and
Poor Taxpayer Access to IRS Cloud 1993
Filing Season (GAO/GGD-94-65, Dec. 22, 1993).

Tax Administration: IRS Can Improve
Controls Over Electronic Filing Fraud
(GAO/GGD-93-27, Dec. 30, 1992).




Page 42                GAO/HR-97-8 IRS Management
1997 High-Risk Series



             An Overview (GAO/HR-97-1)

             Quick Reference Guide (GAO/HR-97-2)

             Defense Financial Management (GAO/HR-97-3)

             Defense Contract Management (GAO/HR-97-4)

             Defense Inventory Management (GAO/HR-97-5)

             Defense Weapon Systems Acquisition
             (GAO/HR-97-6)

             Defense Infrastructure (GAO/HR-97-7)

             IRS   Management (GAO/HR-97-8)

             Information Management and Technology
             (GAO/HR-97-9)

             Medicare (GAO/HR-97-10)

             Student Financial Aid (GAO/HR-97-11)

             Department of Housing and Urban
             Development (GAO/HR-97-12)

             Department of Energy Contract Management
             (GAO/HR-97-13)




             Page 43                   GAO/HR-97-8 IRS Management
1997 High-Risk Series




Superfund Program Management
(GAO/HR-97-14)




The entire series of 14 high-risk reports
can be ordered by using the order
number GAO/HR-97-20SET.


Page 44                 GAO/HR-97-8 IRS Management
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