GAO

United States Government Accountability Office

A

Statement for the Record

For the Subcommittee on Transportation, Treasury, the 

Judiciary, Housing and Urban Development, and Related 

Agencies, Committee on Appropriations, U.S. Senate

For Release on

Wednesday, April 27, 2005 INTERNAL REVENUE 

SERVICE

Assessment of the Fiscal 

Year 2006 Budget Request

Statement for the record by James R. White 

Director 

Strategic Issues

Statement for the record by David A. Powner 

Director 

Information Technology Management Issues 

GAO-05-566
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-566.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact James R. White 

(202) 512-9110 or whitej@gao.gov. 

Highlights of GAO-05-566, a statement for 

the record for the Subcommittee on 

Transportation, Treasury, the Judiciary, 

Housing and Urban Development, and 

Related Agencies, Committee on 

Appropriations, 

April 27, 2005

INTERNAL REVENUE SERVICE

Assessment of the Fiscal Year 2006 

Budget Request 

IRS’s fiscal year 2006 budget request of $10.9 billion is an increase of 3.7 

percent over last year’s enacted levels. This includes an 8 percent increase 

for enforcement, and a 1 percent and 2 percent decrease for taxpayer service 

and BSM. However, the potential impact of these changes on taxpayers in 

either the short- or long-term is unclear, because IRS has not provided 

details of proposed taxpayer service reductions, and although it is 

developing long-term goals, they are not yet finalized. Because of the 

proposed reductions and new and improved taxpayer services in recent 

years, this is an opportune time to examine the menu of services IRS 

provides. It may be possible to maintain the overall level of service to 

taxpayers by offsetting reductions in some areas with new and improved 

service in other areas such as on IRS’s Web site. 

Taxpayers and IRS are seeing some payoff from the BSM program, with the 

deployment of initial phases of several modernized systems in 2004. 

Nevertheless, the BSM program continues to be high-risk, in part, because 

projects have incurred significant cost increases and schedule delays and the 

program faces major challenges in areas such as human capital and 

requirements management. As a result of budget reductions and other 

factors, IRS has made major adjustments. It is too early to tell what effect 

these adjustments will have on the program, but they are not without risk 

and could potentially impact future budgets. Further, the BSM program is 

based on strategies developed years ago, which, coupled with the delays and 

changes brought on by budget reductions, indicates that it is time for IRS to 

revisit its long-term goals, strategy, and plans for BSM. Because of these 

challenges, IRS is redefining and refocusing the BSM program. 

Likewise, IRS has made progress in implementing best practices that would 

improve its budget development and support for its IT operations and 

maintenance request. In particular, the recent release of a modernized 

financial management system included a cost module. However, at this 

time, historical data is not yet available for IRS to use this module in 

formulating its IT operations and maintenance request. 

IRS Budget Summary for Key Activities, Fiscal Years 2004-2006 

Dollars in millions 

Fiscal 

year 2004 

(enacted) 

Fiscal 

year 2005 

(enacted) 

Fiscal 

year 2006 

(request) 

Percent 

change 

(2004-

2005) 

Percent 

change 

(2005-

2006) 

Percent 

change 

(2004- 

2006) 

Taxpayer 

service $3,710 $3,606 $3,567 -2.8% -1.1% -3.8% 

Enforcement 6,052 6,392 6,893 5.6 7.8 13.9% 

BSM 388 203 199 -47.6 -2.0 -48.7% 

Source: GAO analysis of IRS data. 

Note: Numbers may not add due to rounding. 

The Internal Revenue Service (IRS) 

has been shifting its priorities from 

taxpayer service to enforcement 

and its management of Business 

Systems Modernization (BSM) 

from contractors to IRS staff. 

Although there are sound reasons 

for these adjustments, they also 

involve risks. 

With respect to the fiscal year 2006 

budget request, GAO assessed (1) 

how IRS proposes to balance its 

resources between taxpayer 

service and enforcement programs 

and the potential impact on 

taxpayers, (2) status of IRS's 

efforts to develop and implement 

the BSM program, and (3) the 

progress IRS has made in 

implementing best practices in 

developing its Information 

Technology (IT) operations and 

maintenance budget. 

What GAO Recommends

In a related statement (GAO-05-

416T), GAO recommended that the 

Commissioner of Internal Revenue 

supplement the 2006 budget 

request with more detailed 

information on how proposed 

service reductions would impact 

taxpayers. GAO has 

recommendations still outstanding 

related to BSM management 

controls and IT budget 

justification. 
Page 1 GAO-05-566 

Mr. Chairman and Members of the Subcommittee:

We are pleased to present this statement for the record regarding the 

Internal Revenue Service’s (IRS) fiscal year 2006 budget request and in 

support of your April 7, 2005 hearing on IRS’s appropriations. 

IRS is in the midst of making significant adjustments to its modernization 

strategy to better serve taxpayers and ensure their compliance with the 

nation’s tax laws. It is now seven years since the passage of the Internal 

Revenue Service Restructuring and Reform Act of 1998 (RRA 98)1

 and IRS 

is shifting its priorities from improving taxpayer service to strengthening 

tax law enforcement efforts. IRS is also adjusting its strategy for managing 

its Business Systems Modernization (BSM) effort by shifting significant 

program management responsibilities from contractor to IRS staff. 

Although there are sound reasons for these adjustments, they also involve 

risk. 

We have reported that IRS has made progress improving taxpayer service 

since the passage of RRA 98.2

 For example, IRS’s telephone assistance is 

now more accessible and accurate. Further, IRS is more efficient at 

processing tax returns, in part, because of the growth of electronic filing, 

and has cut processing staff. IRS has also implemented some modernized 

information systems and increased its capacity to manage large systems 

acquisition and development programs. However, progress has not been 

uniform. We have reported on large and pervasive declines in IRS’s tax law 

enforcement programs after 1998. We have also reported that a number of 

systems modernization projects were over budget and behind schedule.3

 

As noted, IRS is shifting its priorities to better address these problems. The 

risk, as IRS shifts its priorities towards enforcement, is that some of the 

gains in the quality of taxpayer service could be surrendered. There are 

analogous risks associated with moving more of the management of BSM 

in-house.

1

 Pub. L. No. 105-206 (1998). 

2

 See for example, GAO-05-67, Tax Administration: IRS Improved Performance in the 

2004 Filing Season, But Better Data on the Quality of Some Services Are Needed

(Washington, D.C.: Nov. 15, 2004).

3

 GAO, Internal Revenue Service: Assessment of Fiscal Year 2005 Budget Request and 

2004 Filing Season Performance, GAO-04-560T (Washington, D.C.: Mar. 30, 2004).
Page 2 GAO-05-566 

With these risks in mind, our statement for the record discusses IRS’s fiscal 

year 2006 budget request. To address your request to provide this 

statement, we assessed (1) how IRS proposes to balance its resources 

between taxpayer service and enforcement programs and the potential 

impact on taxpayers, (2) the status of IRS’s efforts to develop and 

implement the BSM program, and (3) the progress IRS has made in 

implementing best practices for developing its information technology (IT) 

operations and maintenance budget. 

Our assessment of the budget request and BSM is based on a comparative 

analysis of IRS’s fiscal year 2002 through 2006 budget requests, funding, 

expenditures, other documentation, and interviews with IRS officials. For 

this assessment, we used historical budget and performance data from 

reports and budget requests used by IRS, Department of Treasury, and 

Office of Management and Budget (OMB). In past work, we assessed IRS’s 

budget and performance data.4

 Since the data sources and procedures for 

producing this year’s budget data have not significantly changed from prior 

years, we determined that the data were sufficiently reliable for the 

purposes of this report although for fiscal years 2005 and 2006 subject to 

change. Regarding our analysis of IRS’s BSM program, we primarily used 

the agency’s BSM expenditure plans to determine the status of the 

program. To assess the reliability of the cost and schedule information 

contained in these plans, we interviewed applicable IRS officials to gain an 

understanding of the data and discuss our use of that data. In addition, we 

checked that information in the plans was consistent with information 

contained in IRS internal briefings. Accordingly, we determined that the 

data in the plans were sufficiently reliable for purposes of this statement. 

We performed our work in Washington, D.C. and Atlanta, Georgia from 

December 2004 through March 2005, in accordance with generally 

accepted government auditing standards. 

In summary, our assessment shows that:

• IRS’s 2006 fiscal year budget request reflects a continuing shift in 

priorities from improving taxpayer service to strengthening 

enforcement efforts, but the potential impact of these changes on 

4

 GAO, Tax Administration: IRS Needs to Further Refine Its Tax Filing Season 

Performance Measures, GAO-03-143 (Washington, D.C.: Nov. 22, 2002) and GAO, Financial 

Audit: IRS’s Fiscal Years 2004 and 2003 Financial Statements, GAO-05-103 (Washington, 

D.C.: Nov. 10, 2004).
Page 3 GAO-05-566 

taxpayers in both the short- and long-term is unclear. IRS is requesting 

$10.9 billion, an increase of 3.7 percent over fiscal year 2005 enacted 

levels. This includes an 8 percent increase for enforcement, and a 1 

percent and 2 percent decrease for taxpayer service and BSM, 

respectively. IRS has not finalized the details on where reductions in 

taxpayer service would occur. In addition, IRS is developing, but 

currently lacks, long-term goals that can help IRS inform stakeholders, 

including the Congress, and aid them in assessing performance and 

making budget decisions. In light of the current budget environment and 

IRS’s improvements in taxpayer service over the last several years, this 

is an opportune time to reconsider the menu of services it provides. It 

may be possible to maintain the overall level of assistance to taxpayers 

by changing the menu of services offered, offsetting reductions in some 

areas with new and improved service in other areas such as on IRS’s 

Web site. 

• IRS has taken important steps forward towards implementing the BSM 

program by delivering the initial phases of several modernized systems 

in 2004 and early 2005. Nevertheless, BSM continues to be high risk 

because, in part, its projects have incurred significant cost increases and 

schedule delays, and the program continues to face major challenges. As 

a result of funding reductions and other factors, IRS has made major 

adjustments to the BSM program, including reducing the management 

reserve and changing the mix and roles of contractor versus federal staff 

used to manage the program. It is too early to tell what effect these 

adjustments will ultimately have on the BSM program, but they are not 

without risk, could potentially impact future budget requests, and will 

delay the implementation of certain functionality that was intended to 

provide benefit to IRS operations and taxpayers. Finally, the BSM 

program is based on visions and strategies developed years ago, which, 

coupled with the already significant delays the program has experienced 

and the changes brought on by the budget reductions, indicates that it is 

time for IRS to revisit its long-term goals, strategy, and plans for BSM, 

including an assessment of when significant future BSM functionality 

would be delivered. According to the Associate Chief Information 

Officer (CIO) for BSM, IRS is redefining and refocusing this program.

• IRS has made progress toward implementing investment management 

best practices that would improve its budget development and support 

for its IT operations and maintenance funding requests. For example, 

the recent release of a new accounting system included an activitybased cost module, which IRS considered to be a necessary action to 
Page 4 GAO-05-566 

implement these best practices. However, Office of the Chief Financial 

Officer officials stated that IRS needs 3 years of actual costs to have the 

historical data necessary to provide a basis for future budget estimates. 

Accordingly, they expect that IRS will begin using the activity-based cost 

module in formulating the fiscal year 2008 budget and will have the 

requisite 3 years of historical data in time to develop the fiscal year 2010 

budget.

IRS’s Budget Request 

Continues to Shift 

Priority from Taxpayer 

Service to 

Enforcement, but the 

Short- and Long-term 

Impacts on Taxpayers 

Are Unclear

IRS’s fiscal year 2006 budget request reflects a continuing shift in priorities 

by proposing reductions in taxpayer service and increases in enforcement 

activities. The request does not provide details about how the reductions 

will impact taxpayers in the short-term. Nor does IRS have long-term goals; 

thus the contribution of the fiscal year 2006 budget request to achieving 

IRS’s mission in the long-term is unclear. Because of budget constraints 

and the progress IRS has made improving the quality of taxpayer services, 

this is an opportune time to reconsider the menu of services IRS offers. 

IRS Is Proposing Reductions 

in Taxpayer Service and 

BSM and Increases in 

Enforcement 

IRS is requesting $10.9 billion, which includes just over a 1 percent 

decrease for taxpayer service, a 2 percent decrease for BSM, and nearly an 

8 percent increase for enforcement, as shown in table 1.5

 As table 1 further 

shows, the changes proposed in the 2006 budget request continue a trend 

from 2004. In comparison to the fiscal year 2004 enacted budget, the 2006 

budget request proposes almost 4 percent less for service, almost 49 

percent less for BSM, and nearly 14 percent more for enforcement.6

 

5

 IRS is proposing a new budget structure beginning in fiscal year 2006. The proposal would 

integrate support costs and the IT appropriation into taxpayer assistance and operations 

appropriation with eight program areas involving both taxpayer service and enforcement. 

See appendix I for information on the new budget structure. 

6

 The Administration proposes to fully fund enforcement efforts and costs as contingent 

appropriations. This would be achieved by using one of two budgetary mechanisms that 

would allow for an adjustment to total discretionary spending for fiscal year 2006 of not 

more than $446 million for IRS tax enforcement. 
Page 5 GAO-05-566 

Table 1: IRS Budget Summary for Key Activities, Fiscal Years 2004-2006)

Source: GAO analysis of IRS data.

Note: Numbers may not add due to rounding. 

As table 1 also shows, taxpayer service sustained a reduction of $104 

million or 2.8 percent between fiscal years 2004 and 2005. According to IRS 

officials, the majority of this reduction was the result of consolidating 

paper-processing operations, shifting resources from service to 

enforcement, and reducing some services. IRS officials said that this 

reduction is not expected to adversely impact the services they provide to 

taxpayers but added that the agency cannot continue to absorb reductions 

in taxpayer service without beginning to compromise some services. 

For fiscal years 2005 and 2006, table 2 shows some details of changes in 

both dollars and full-time equivalents (FTE).7

 Both are shown because 

funding changes do not translate into proportional changes in FTEs due to 

cost increases for salaries, rent, and other items. For example, the $39 

million or 1.1 percent reduction in taxpayer service translates into a 

reduction of 1,385 FTEs or 3.6 percent. Similarly, the over $500 million or 

7.8 percent increase in enforcement spending translates into an increase of 

1,961 FTEs or 3.4 percent. 

Dollars in millions

Fiscal

year 2004

(enacted)

Fiscal

year 2005

(enacted)

Fiscal

year 2006

(requested)

Percent

change

(2004-

2005)

Percent

change

(2005-

2006)

Percent

change

(2004-

2006)

Taxpayer 

Service $3,710 $3,606 $3,567 -2.8% -1.1% -3.8%

Enforcement 6,052 6,392 6,893 5.6 7.8 13.9

BSM 388 203 199 -47.6 -2.0 -48.7

7

 According to IRS, an FTE is the equivalent of one person working full time for 1 year 

without overtime.
Page 6 GAO-05-566 

Table 2: IRS Requested Changes in Funding for Taxpayer Service and Enforcement, Fiscal Years 2005 and 2006 (requested)

Source: GAO analysis of IRS data.

Note: Numbers may not add due to rounding. 

The difference between changes in dollars and FTEs could be even larger 

because of unbudgeted expenses. Unbudgeted expenses have consumed 

some of IRS’s budget increases and internal savings increases over the last 

few years. Unbudgeted expenses include unfunded portions of annual 

salary increases, which can be substantial given IRS’s large workforce, and 

other costs such as higher-than-budgeted rent increases. According to IRS 

officials, these unbudgeted expenses accounted for over $150 million in 

each of the last 4 years. 

An IRS official also told us they anticipate having to cover unbudgeted 

expenses in 2006. As of March 2005, IRS officials were projecting 

unbudgeted salary increases of at least $40 million. This projection could 

change since potential federal salary increases for 2006 have not been 

determined. 

Program activities 

Fiscal year 2005 (estimated) Fiscal year 2006 (requested)

Change fiscal year 2005 – 

fiscal year 2006

Dollars

(in millions)

Full-time

equivalents

Dollars

(in millions)

Full-time

equivalents

Dollars

(in millions)

Full-time

equivalents

Assistance $1,829 20,798 $1,806 20,160 - $23 - 638

Outreach 500 2,473 466 1,905 - 34 - 568

Processing 1,276 15,695 1,295 15,516 19 - 179

Taxpayer service subtotal 3,606 38,966 3,567 37,581 - 39 - 1,385

Research 154 1,119 158 1,119 4 0

Examination 3,478 31,498 3,712 32,284 234 786

Collection 1,826 18,023 1,991 18,815 165 792

Investigation 682 4,899 767 5,250 85 351

Regulatory 253 1,912 265 1,944 12 32

Enforcement subtotal 6,392 57,451 6,893 59,412 500 1,961

Taxpayer service and 

enforcement total 9,998 96,417 10,460 96,993 462 576
Page 7 GAO-05-566 

IRS Is Proposing $39 Million 

Less for Taxpayer Service, 

but the Impact on Taxpayers 

Is Unclear 

The budget request provides some detail on how IRS plans to absorb cost 

increases in the taxpayer service budget. IRS is proposing a gross 

reduction of over $134 million in taxpayer service from reexamining the 

budget’s base and plans to use more than $95 million of it to cover annual 

increases such as salaries. This leaves a net reduction of nearly $39 million 

or 1.1 percent in the taxpayer service budget. The extent to which IRS is 

able to achieve the gross reductions will impact its ability to use the funds 

as anticipated. 

Decisions on how the $134 million gross reduction would be absorbed were 

not finalized prior to releasing the budget. According to IRS officials, some 

of the reductions would result from efficiency gains such as reducing 

printing and postage costs; however, others would result from reductions 

in the services provided to taxpayers such as shortening the hours of tollfree telephone service operations. The officials also said most decisions 

have now been made about general areas for reduction and most changes 

will not be readily apparent to taxpayers. 

Although IRS has made general decisions about the reductions, many of the 

details have yet to be determined. Therefore, the extent of the impact on 

taxpayers in the short term is unclear. For example, IRS plans to reduce 

dependence on field assistance, including walk-in sites, but has not reached 

a final decision on how to reduce services. Table 3 provides further detail 

on how IRS is proposing to reduce funding and resources for taxpayer 

service.
Page 8 GAO-05-566 

Table 3: IRS Requested Changes in Funding and Full-time Equivalents for Taxpayer Service, Fiscal Years 2005 and 2006 

Source: GAO analysis of IRS data.

Note: Numbers may not add due to rounding.

IRS Continues to Request 

Significant Increases for 

Enforcement to Build on Recent 

Hiring Gains

IRS’s fiscal year 2006 budget request is the sixth consecutive year the 

agency has requested additional staffing for enforcement. However, up 

until last year, IRS was unable to increase enforcement staffing; 

unbudgeted costs and other priorities consumed the budget increase. 

IRS’s proposal for fiscal year 2006, if implemented as planned, would return 

enforcement staffing in these occupations to their highest levels since 1999. 

Of the more than $500 million increase requested for 2006, about $265 

million would fund enforcement initiatives, over $182 million would be 

used in part for salary increases, and over $55 million is a proposal to 

transfer funding authority from the Department of Justice’s Interagency 

Crime and Drug Enforcement. The $500 million increase would be 

supplemented by internal enforcement savings of $88 million. As is the 

case with taxpayer service savings, the extent to which IRS achieves 

enforcement savings will affect its ability to fund the new enforcement 

initiatives. 

The $265 million for new enforcement initiatives consist of:

Program activities 

Fiscal year 2005 (actual) Fiscal year 2006 (requested) 

Change fiscal year

2005-2006

Dollars

 (in millions)

Full-time

equivalents

Dollars

(in millions)

Full-time

equivalents

Dollars 

(in millions)

Full-time

equivalents

Assistance

Electronic $1,536 17,745 $1,557 17,721 $21 -24

Field 274 2,796 230 2,181 -44 -615

EITC assistance 19 258 19 258 < 1 0

Assistance total 1,829 20,798 1,806 20,160 -23 -638

Outreach

Publication & Media 291 821 276 520 -15 -301

Taxpayer Education & 

Communication 203 1,592 184 1,326 -19 -266

EITC Outreach 7 60 7 60 < 1 0

Outreach total 500 2,473 466 1,905 -34 -568

Processing 1,276 15,695 1,295 15,516 19 -179

Taxpayer service total 3,606 38,966 3,568 37,581 -39 -1,385
Page 9 GAO-05-566 

• $149.7 million and 920 FTEs to attack corrosive non-compliance activity 

driving the tax gap such as abusive trusts and shelters, including 

offshore credit cards and organized tax resistance;

• $51.8 million and 236 FTEs to detect and deter corrosive corporate noncompliance to attack complex abusive tax avoidance transactions on a 

global basis and challenge those who promote their use;

• $37.9 million and 417 FTEs to increase individual taxpayer compliance 

by identifying and implementing actions to address non-compliance 

with filing requirements; increasing Automated Underreporter 

resources to address the reporting compliance tax gap; increasing audit 

coverage; and expanding collection work in walk-in sites;

• $14.5 million and 77 FTEs to combat abusive transactions by entities 

with special tax status by initiating examinations more promptly, 

safeguarding compliant customers from unscrupulous promoters, and 

increasing vigilance to ensure that the assets of tax-exempt 

organizations are put to their intended tax-preferred purpose and not 

misdirected to fund terrorism or for private gain; and

• $10.8 million and 22 FTEs to curtail fraudulent refund crimes.

The $88 million in internal savings would be reinvested to perform the 

following activities:

• $66.7 million and 585 FTEs to devote resources to front-line 

enforcement activities;

• $14.9 million and 156 FTEs to, in part, address bankruptcy-related 

taxpayer questions; and

• $6.7 million and 52 FTEs to address complex, high-risk issues such as 

compliance among tax professionals. 

In the past, IRS has had trouble achieving enforcement staffing increases 

because other priorities, including unbudgeted expenses, have absorbed 

additional funds. IRS achieved some gains in 2004 and expects modest 

gains in 2005. Figure 1 shows that the number of revenue agents (those 

who audit complex returns), revenue officers (those who do field 

collection work), and special agents (those who perform criminal 
Page 10 GAO-05-566 

investigations) decreased over 21 percent between 1998 and 2003, but 

increased almost 6 percent from 2003 to 2004. 

Figure 1: Revenue Agents, Revenue Officers, and Special Agents, Fiscal Years 1998-

2006

a Fiscal years 2005 and 2006 are IRS projections.

IRS’s recent gains in enforcement staffing are encouraging, as tax law 

enforcement continues to remain an area of high risk for the federal 

government because the resources IRS has dedicated to enforcing the tax 

laws have declined, while IRS’s enforcement workload—measured by the 

number of taxpayer returns filed—has continually increased.8

 Figure 2 

shows the trend in field, correspondence, and total audit rates since 1995. 

Field audits involve face-to-face audits and correspondence audits are 

8

 GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005).

0

5,000

10,000

15,000

20,000

25,000

Total agents

Special agents

Revenue officers

Revenue agents

2006a 2005a 1998 1999 2000 2001 2002 2003 2004

Full-time equivalents

Fiscal year

Source: GAO analysis of IRS data.

IRS 

projections
Page 11 GAO-05-566 

typically less complex involving communication through notices. IRS 

experienced steep declines in audit rates from 1995 to 1999, but the audit 

rate—the proportion of tax returns that IRS audits each year—has slowly 

increased since 2000. The figure shows that the increase in total audit rates 

of individual filers has been driven mostly by correspondence audits, while 

more complex field audits, continue to decline. 

Figure 2: Audit Rate of Individual Income Tax Returns, Fiscal Years 1995-2004

The link between the decline in enforcement staff and the decline in 

enforcement actions, such as audits, is complicated, and the real impact on 

taxpayers’ rate of voluntary compliance is not known. This leaves open the 

question of whether the declines in IRS’s enforcement programs are 

eroding taxpayers’ incentives to voluntarily comply. IRS’s National 

Research Program (NRP) recently completed a study on compliance by 

individual tax filers based on tax data provided on 2001 tax returns. The 

study estimated that the tax gap—the difference between what taxpayers 

owe and what they pay—is at least $312 billion per year as of 2001 and 

could be as large as $353 billion. This study is important for several 

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Total

Correspondence

Field

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Audit rate

Fiscal year

Source: GAO analysis of IRS data.
Page 12 GAO-05-566 

reasons beyond measuring compliance. It is intended to help IRS better 

target its enforcement actions, such as audits, on non-compliant taxpayers, 

and minimize audits of compliant taxpayers. It should also help IRS better 

understand the impact of taxpayer service on compliance.

IRS Is Developing Longterm Goals That Can Be 

Used to Assess Performance 

and Make Budget Decisions

IRS is developing but currently lacks long-term goals that can be used to 

assess performance and make budget decisions.9

 Long-term goals and 

results measurement are a component of the statutory strategic planning 

and management framework that the Congress adopted in the Government 

Performance and Results Act of 1993.10 As a part of this comprehensive 

framework, long-term goals that are linked to annual performance 

measures can help guide agencies when considering organizational 

changes and making resource decisions. 

A recent Program Assessment Rating Tool (PART) review conducted by 

OMB reported that IRS lacks long-term goals.11 As a result, IRS has been 

working to identify and establish long-term goals for all aspects of its 

operations for over a year. IRS officials said these goals will be finalized 

and provided publicly as an update to the agency’s strategic plan before 

May 2005. 

For IRS and its stakeholders, such as the Congress, long-term goals can be 

used to assess performance and progress towards these goals, and 

determine whether budget decisions contribute to achieving those goals. 

9

 IRS has one long-term goal set by the Congress in RRA 98 for IRS to have 80 percent of all 

individual income tax returns filed electronically. 

10 Pub. L. No. 103-62 (1993). The Government Performance and Results Act of 1993 seeks to 

improve the management of federal programs, as well as their effectiveness and efficiency, 

by requiring executive agencies to prepare multiyear strategic plans, annual performance 

plans, and annual performance reports. Under the Act, strategic plans are the starting point 

for setting goals and measuring progress towards them. The Act requires executive agencies 

to develop strategic plans that include an agency’s mission statement, long-term general 

goals, and the strategies that the agency will use to achieve these goals. The plans should 

also explain the key external factors that could significantly affect achievement of these 

goals, and describe how long-term goals will be related to annual performance goals.

11 The PART was applied during the fiscal year 2004 budget cycle to “programs” selected by 

OMB. The PART includes general questions in each of four broad topics to which all 

programs are subjected: (1) program purpose and design, (2) strategic planning, (3) 

program management, and (4) program results (i.e., whether a program is meeting its longterm and annual goals). OMB also makes an overall assessment on program effectiveness.
Page 13 GAO-05-566 

Without long-term goals, the Congress and other stakeholders are 

hampered in evaluating whether IRS is making satisfactory long-term 

progress. Further, without such goals, the extent to which IRS’s 2006 

budget request would help IRS achieve its mission over the long-term is 

unclear. 

This Is an Opportune Time 

to Review IRS’s Menu of 

Taxpayer Services 

For at least two reasons, this is an opportune time to review the menu of 

taxpayer services that IRS provides. First, IRS’s budget for taxpayer 

services was reduced in 2005 and an additional reduction is proposed for 

2006. As already discussed, these reductions have forced IRS to propose 

scaling back some services. Second, as we have reported, IRS has made 

significant progress in improving the quality of its taxpayer services. For 

example, IRS now provides many Internet services that did not exist a few 

years ago and has noticeably improved the quality of telephone services. 

This opens up the possibility of maintaining the overall level of taxpayer 

service but with a different menu of service choices. Cuts in selected 

services could be offset by the new and improved services.

Generally, as indicated in the budget, the menu of taxpayer services that 

IRS provides covers assistance, outreach, and processing. Assistance 

includes answering taxpayer questions via telephone, correspondence, and 

face-to-face at its walk-in sites. Outreach includes educational programs 

and the development of partnerships. Processing includes issuing millions 

of tax refunds. 

When considering program reductions, we support a targeted approach 

rather than across-the-board cuts.12 A targeted approach helps reduce the 

risk that effective programs are reduced or eliminated while ineffective or 

lower priority programs are maintained. 

With the above reasons in mind for reconsidering IRS’s menu of services, 

we have compiled a list of options for targeted reductions in taxpayer 

service. The options on this list are not recommendations but are intended 

to contribute to a dialogue about the tradeoffs faced when setting IRS’s 

budget. The options presented meet at least one of the following criteria 

12 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP (Washington, D.C.: February 2005).
Page 14 GAO-05-566 

that we generally use to evaluate programs or budget requests.13 These 

criteria include that the activity 

• duplicates other efforts that may be more effective and/or efficient; 

• historically does not meet performance goals or provide intended 

results as reported by GAO, the Treasury Inspector General for Tax 

Administration (TIGTA), IRS, or others; 

• experiences a continued decrease in demand; 

• lacks adequate oversight, implementation and management plans, or 

structures and systems to be implemented effectively; 

• has been the subject of actual or requested funding increases that 

cannot be adequately justified; or

• has the potential to make an agency more self-sustaining by charging 

user fees for services provided.

We recognize that the options listed below involve tradeoffs. In each case, 

some taxpayers would lose a service they use. However, the savings could 

be used to help maintain the quality of other services. We also want to give 

IRS credit for identifying savings, including some on this list. The options 

include

• closing walk-in sites. Taxpayer demand for walk-in services has 

continued to decrease and staff answer a more limited number of tax 

law questions in person than staff answer via telephone. 

• limiting the type of telephone questions answered by IRS assistors. IRS 

assistors still answer some refund status questions even though IRS 

provides automated answers via telephone and its Web site. 

• mandating electronic filing for some filers such as paid preparers or 

businesses. As noted, efficiency gains from electronic filing have 

enabled IRS to consolidate paper processing operations. 

13 We selected these criteria from a variety of sources based on generally accepted 

government auditing standards. 
Page 15 GAO-05-566 

• charging for services. For example, IRS provides paid preparers with 

information on federal debts owed by taxpayers seeking refund 

anticipation loans. 

Progress in BSM 

Implementation, but 

the Program Remains 

High Risk and Budget 

Reductions Have 

Resulted in Significant 

Adjustments

Although IRS has implemented important elements of the BSM program, 

much work remains. In particular, the BSM program remains at high risk 

and has a long history of significant cost overruns and schedule delays. 

Furthermore, budget reductions have resulted in significant adjustments to 

the BSM program, although it is too early to determine their ultimate effect.

IRS Has Made Progress in 

Implementing BSM, but 

Much Work Remains

IRS has long relied on obsolete automated systems for key operational and 

financial management functions, and its attempts to modernize these aging 

computer systems span several decades. IRS’s current modernization 

program, BSM, is a highly complex, multibillion-dollar program that is the 

agency’s latest attempt to modernize its systems. BSM is critical to 

supporting IRS’s taxpayer service and enforcement goals. For example, 

BSM includes projects to allow taxpayers to file and retrieve information 

electronically and to provide technology solutions to help reduce the 

backlog of collections cases. BSM is important for another reason. It allows 

IRS to provide the reliable and timely financial management information 

needed to account for the nation’s largest revenue stream and better enable 

the agency to justify its resource allocation decisions and congressional 

budgetary requests.

Since our testimony before this subcommittee on last year’s budget 

request, IRS has deployed initial phases of several modernized systems 

under its BSM program. The following provides examples of the systems 

and functionality that IRS implemented in 2004 and the beginning of 2005.

• Modernized e-File (MeF). This project is intended to provide electronic 

filing for large corporations, small businesses, and tax-exempt 

organizations. The initial releases of this project were implemented in 

June and December 2004, and allowed for the electronic filing of forms 

and schedules for the form 1120 (corporate tax return) and form 990 

(tax-exempt organizations’ tax return). IRS reported that, during the 
Page 16 GAO-05-566 

2004 filing season, it accepted over 53,000 of these forms and schedules 

using MeF. 

• e-Services. This project created a Web portal and provided other 

electronic services to promote the goal of conducting most IRS 

transactions with taxpayers and tax practitioners electronically. IRS 

implemented e-Services in May 2004. According to IRS, as of late March 

2005, over 84,000 users have registered with this Web portal.

• Customer Account Data Engine (CADE). CADE is intended to replace 

IRS’s antiquated system that contains the agency’s repository of 

taxpayer information and, therefore, is the BSM program’s linchpin and 

highest priority project. In July 2004 and January 2005, IRS implemented 

the initial releases of CADE, which have been used to process filing year 

2004 and 2005 1040EZ returns, respectively, for single taxpayers with 

refund or even-balance returns. According to IRS, as of March 16, 2005, 

CADE had processed over 842,000 tax returns so far this filing season.

• Integrated Financial System (IFS). This system replaces aspects of 

IRS’s core financial systems and is ultimately intended to operate as its 

new accounting system of record. The first release of this system 

became fully operational in January 2005.

Although IRS is to be applauded for delivering such important 

functionality, the BSM program is far from complete. Future deliveries of 

additional functionality of deployed systems and the implementation of 

other BSM projects are expected to have a significant impact on IRS’s 

taxpayer services and enforcement capability. For example, IRS has 

projected that CADE will process about 2 million returns in the 2005 filing 

season. However, the returns being processed in CADE are the most basic 

and constitute less than 1 percent of the total tax returns expected to be 

processed during the current filing season. IRS expects the full 

implementation of CADE to take several more years. Another BSM 

project—the Filing and Payment Compliance (F&PC) project—is expected 

to increase (1) IRS’s capacity to treat and resolve the backlog of delinquent 

taxpayer cases, (2) the closure of collection cases by 10 million annually by 

2014, and (3) voluntary taxpayer compliance. As part of this project, IRS 

plans to implement an initial limited private debt collection capability in 

January 2006, with full implementation of this aspect of the F&PC project 

to be delivered by January 2008 and additional functionality to follow in 

later years.
Page 17 GAO-05-566 

BSM Program Has History 

of Cost Increases and 

Schedule Delays and Is High 

Risk

The BSM program has a long history of significant cost increases and 

schedule delays, which, in part, has led us to report this program as highrisk since 1995.14 Appendix II provides the history of the BSM life-cycle cost 

and schedule variances. In January 2005 letters to congressional 

appropriation committees, IRS stated that it had showed a marked 

improvement in significantly reducing its cost variances. In particular, IRS 

claimed that it reduced the variance between estimated and actual costs 

from 33 percent in fiscal year 2002 to 4 percent in fiscal year 2004. 

However, we do not agree with the methodology used in the analysis 

supporting this claim. Specifically, (1) the analysis did not reflect actual 

costs, instead it reflected changes in cost estimates (i.e., budget 

allocations) for various BSM projects; (2) IRS aggregated all of the changes 

in the estimates associated with the major activities for some projects, 

such as CADE, which masked that monies were shifted from future 

activities to cover increased costs of current activities; and (3) the 

calculations were based on a percentage of specific fiscal year 

appropriations, which does not reflect that these are multiyear projects. 

In February 2002 we expressed concern over IRS’s cost and schedule 

estimating and made a recommendation for improvement.15 IRS and its 

prime systems integration support (PRIME) contractor have taken action 

to improve their estimating practices, such as developing a cost and 

schedule estimation guidebook and developing a risk-adjustment model to 

include an analysis of uncertainty. These actions may ultimately result in 

more realistic cost and schedule estimates, but our analysis of IRS’s 

expenditure plans16 over the last few years shows continued increases in 

estimated project life-cycle costs (see fig. 3). 

14 For our latest high-risk report, please see GAO, High-Risk Series: An Update, GAO-05-207

(Washington, D.C., January 2005). 

15 GAO, Business Systems Modernization: IRS Needs to Better Balance Management 

Capacity with Systems Acquisition Workload, GAO-02-356 (Washington, D.C.: Feb. 28, 

2002). 

16 BSM funds are unavailable until the IRS submits to congressional appropriations 

committees for approval a modernization expenditure plan that (1) meets the OMB capital 

planning and investment control review requirements; (2) complies with IRS’s enterprise 

architecture; (3) conforms with IRS’s enterprise life-cycle methodology; (4) is approved by 

IRS, the Department of the Treasury, and OMB; (5) is reviewed by GAO; and (6) complies 

with acquisition rules, requirements, guidelines, and systems acquisition management 

practices.
Page 18 GAO-05-566 

Figure 3: Life-cycle Cost Estimates for Key BSM Projects

The Associate CIO for BSM stated that he believes that IRS’s cost and 

schedule estimating has improved in the past year. In particular, he pointed 

out that IRS met its cost and schedule goals for the implementation of the 

latest release of CADE, which allowed the agency to use this system to 

process certain 1040EZ forms in the 2005 filing season. It is too early to tell 

whether this signals a fundamental improvement in IRS’s ability to 

accurately forecast project costs and schedules. 

The reasons for IRS’s cost increases and schedule delays vary. However, we 

have previously reported that they are due, in part, to weaknesses in 

management controls and capabilities. We have previously made 

recommendations to improve BSM management controls, and IRS has 

implemented or begun to implement these recommendations. For example, 

in February 2002, we reported that IRS had not yet defined or implemented 

an IT human capital strategy, and recommended that IRS develop plans for 

Estimates (dollars in millions)

Date expenditure plans submitted to the Congress (month/year) 

Source: GAO analysis of IRS data.

0

20

40

60

80

100

120

140

160

180

200

Integrated Financial System, Release 1

Custodial Accounting Project, Release 1

Modernized e-File, Release 1

e-Services

Customer Account Data Engine, Release 1

11/01 11/02 3/03 9/03 1/04 7/04
Page 19 GAO-05-566 

obtaining, developing, and retaining requisite human capital resources.17 In 

September 2003, TIGTA reported that IRS had made significant progress in 

developing a human capital strategy but that it needed further 

development. In August 2004, the current Associate CIO for BSM identified 

the completion of a human capital strategy as a high priority. Among the 

activities that IRS is implementing are prioritizing its BSM staffing needs 

and developing a recruiting plan. IRS has also identified, and is addressing, 

other major management challenges in areas such as requirements, 

contract, and program management. For example, poorly defined 

requirements have been among the significant weaknesses that have been 

identified as contributing to project cost overruns and schedule delays. As 

part of addressing this problem, in March 2005, the IRS BSM office 

established a requirements management office, although a leader has not 

yet been hired.

IRS Is Adjusting the BSM 

Program in Response to 

Budget Reductions

The BSM program is undergoing significant changes as it adjusts to 

reductions in its budget. Figure 4 illustrates the BSM program’s requested 

and enacted budgets for fiscal years 2004 through 2006.18 For fiscal year 

2005, IRS received about 29 percent less funding than it requested (from 

$285 million to $203.4 million). According to the Senate report for the fiscal 

year 2005 Transportation, Treasury, and General Government 

appropriations bill, in making its recommendation to reduce BSM funding, 

the Senate Appropriations Committee was concerned about the program’s 

cost overruns and schedule delays. In addition, the committee emphasized 

that in providing fewer funds, it wanted IRS to focus on its highest priority 

projects, particularly CADE.19 In addition, IRS’s fiscal year 2006 budget 

request reflects an additional reduction of about 2 percent, or about $4.4 

million, from the fiscal year 2005 appropriation. 

17 GAO-02-356. 

18 IRS uses the appropriated funds to cover contractor costs related to the BSM program. 

IRS funds internal costs for managing BSM with another appropriation. These costs are not 

tracked separately for BSM-related activities. 

19 U.S. Senate, Senate Report 108-342 (2004). 
Page 20 GAO-05-566 

Figure 4: Changes in the BSM budget (dollars in millions)a

a The BSM account authorizes funds to be obligated for 3 years.

It is too early to tell what effect the budget reductions will ultimately have 

on the BSM program. However, the significant adjustments that IRS is 

making to the program to address these reductions are not without risk, 

could potentially impact future budget requests, and will delay the 

implementation of certain functionality that was intended to provide 

benefit to IRS operations and the taxpayer. For example: 

0 10 20 30 40 50 60 70 80 90 100

Source: IRS.

FY04

FY05

FY06

Management reserve

FY04

FY05

FY06

Customer Account Data Engine

FY04

FY05

FY06

No funds requested for FY05

No funds requested for FY06

Custodial Accounting Project

FY04

FY05

FY06

No funds requested for FY05

No funds requested for FY06

Integrated Financial System

FY04

FY05

FY06

Core infrastructure projects

FY04

FY05

FY06

Architecture, integration, 

and management 

FY04

FY05

FY06

Modernized e-File

FY04

FY05

FY06 No funds appropriated for FY05

Filing and Payment Compliance

FY04

FY05

FY06 No funds requested for FY06

e-Services

Requested

Millions of dollars

Enacted
Page 21 GAO-05-566 

• Reductions in Management reserve/project risk adjustments. In 

response to the fiscal year 2005 budget reduction, IRS reduced the 

amount that it had allotted to program management reserve and project 

risk adjustments by about 62 percent (from about $49.1 million to about 

$18.6 million).20 If BSM projects have future cost overruns that cannot 

be covered by the depleted reserve, this reduction could result in (1) 

increased budget requests in future years or (2) delays in planned future 

activities (e.g., delays in delivering promised functionality) to use those 

allocated funds to cover the overruns.

• Shifts of BSM management responsibility from the PRIME contractor 

to IRS. Due to budget reductions and IRS’s assessment of the PRIME 

contractor’s performance, IRS decided to shift significant BSM 

responsibilities for program management, systems engineering, and 

business integration from the PRIME contractor to IRS staff. For 

example, IRS staff are assuming responsibility for cost and schedule 

estimation and measurement, risk management, integration test and 

deployment, and transition management. There are risks associated 

with this decision. To successfully accomplish this transfer, IRS must 

have the management capability to perform this role. Although the BSM 

program office has been attempting to improve this capability through, 

for example, implementation of a new governance structure and hiring 

staff with specific technical and management expertise, IRS has had 

significant problems in the past managing this and other large 

development projects, and acknowledges that it has major challenges to 

overcome in this area.

• Suspension of the Custodial Accounting Project (CAP). Although the 

initial release of CAP went into production in September 2004, IRS has 

decided not to use this system and to stop work on planned 

improvements due to budget constraints. According to IRS, it made this 

decision after it evaluated the business benefits and costs to develop 

and maintain CAP versus the benefits expected to be provided by other 

projects, such as CADE. Among the functionality that the initial releases 

of CAP were expected to provide were (1) critical control and reporting 

capabilities mandated by federal financial management laws; (2) a 

traceable audit trail to support financial reporting; and (3) a subsidiary 

ledger to accurately and promptly identify, classify, track, and report 

20 We did not include in our calculations, reductions to specific project risk adjustment 

amounts that were made for reasons other than the fiscal year 2005 budget reduction. 
Page 22 GAO-05-566 

custodial revenue transactions and unpaid assessments. With the 

suspension of CAP, it is now unclear how IRS plans to replace the 

functionality this system was expected to provide, which was intended 

to allow the agency to make meaningful progress toward addressing 

long-standing financial management weaknesses. IRS is currently 

evaluating alternative approaches to addressing these weaknesses. 

• Reductions in planned functionality. According to IRS, the fiscal year 

2006 funding reduction will result in delays in planned functionality for 

some of its BSM projects. For example, IRS no longer plans to include 

Form 1041 (the income tax return for estates and trusts) in the fourth 

release of Modernized e-File, which is expected to be implemented in 

fiscal year 2007. 

The BSM program is based on visions and strategies developed in 2000 and 

2001. The age of these plans, in conjunction with the significant delays 

already experienced by the program and the substantive changes brought 

on by budget reductions, indicate that it is time for IRS to revisit its longterm goals, strategy, and plans for BSM. Such an assessment would include 

an evaluation of when significant future BSM functionality would be 

delivered. IRS’s Associate CIO for BSM has recognized that it is time to 

recast the agency’s BSM strategy because of changes that have occurred 

subsequent to the development of the program’s initial plans. According to 

this official, IRS is redefining and refocusing the BSM program, and he 

expects this effort to be completed by the end of this fiscal year.

Additional Actions 

Needed to Improve 

Budgeting for IT 

Operations and 

Maintenance

IRS has requested about $1.62 billion for IT operations and maintenance in 

fiscal year 2006, within its proposed new Tax Administration and 

Operations account. Under the prior years’ budget structure, these funds 

were included in a separate account, for which IRS received an 

appropriation of about $1.59 billion in fiscal year 2005. The $1.62 billion 

requested in fiscal year 2006 is intended to fund the personnel costs for IT 

staff (including staff supporting the BSM program) and activities such as IT 

security, enterprise networks, and the operations and maintenance costs of 

its current systems. We have previously expressed concern that IRS does 

not employ best practices in the development of its IT operations and 
Page 23 GAO-05-566 

maintenance budget request.21 Although IRS has made progress in 

addressing our concern, more work remains.

The Paperwork Reduction Act (PRA) of 199522 requires federal agencies to 

be accountable for their IT investments and responsible for maximizing the 

value and managing the risks of their major information systems initiatives. 

The Clinger-Cohen Act of 199623 establishes a more definitive framework 

for implementing the PRA’s requirements for IT investment management. It 

requires federal agencies to focus more on the results they have achieved 

and introduces more rigor and structure into how agencies are to select 

and manage IT projects. In addition, leading private- and public-sector 

organizations have taken a project- or system-centric approach to 

managing not only new investments but also operations and maintenance 

of existing systems. As such, these organizations

• identify operations and maintenance projects and systems for inclusion 

in budget requests;

• assess these projects or systems on the basis of expected costs, 

benefits, and risks to the organization;

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

• use this information to develop and support budget requests.

This focus on projects, their outcomes, and risks as the basic elements of 

analysis and decision making is incorporated in the IT investment 

management approach that is recommended by OMB and GAO. By using 

these proven investment management approaches for budget formulation, 

agencies have a systematic method, on the basis of risk and return on 

investment, to justify what are typically substantial information systems 

operations and maintenance budget requests. 

In our assessment of IRS’s fiscal year 2003 budget request, we reported that 

the agency did not develop its information systems operations and 

21 GAO, Internal Revenue Service: Improving Adequacy of Information Systems Budget 

Justification, GAO-02-704 (Washington, D.C., June 28, 2002). 

22 Pub. L. No.104-13 (1995). 

23 Pub. L. No. 104-106 section 5001 et. seq. (1996). 
Page 24 GAO-05-566 

maintenance request in accordance with the investment management 

approach used by leading organizations. We recommended that IRS 

prepare its future budget requests in accordance with these best 

practices.24 To address our recommendation, IRS agreed to take a variety of 

actions, which it has made progress in implementing. For example, IRS 

stated that it planned to develop an activity-based cost model to plan, 

project, and report costs for business tasks/activities funded by the 

information systems budget. The recent release of IFS included an activitybased cost module, but IRS does not currently have historical cost data to 

populate this module. According to officials in the Office of the Chief 

Financial Officer, IRS is in the process of accumulating these data. These 

officials stated that IRS needs 3 years of actual costs to have the historical 

data that would provide a basis for future budget estimates. Accordingly, 

these officials expected that IRS would begin using the IFS activity-based 

cost module in formulating the fiscal year 2008 budget request and would 

have the requisite 3 years’ of historical data in time to develop the fiscal 

year 2010 budget request. In addition, IRS planned to develop a capital 

planning guide to implement processes for capital planning and investment 

control, budget formulation and execution, business case development, 

and project prioritization. IRS has developed a draft guide, which is 

currently under review by IRS executives, and IRS expects it to become 

policy on October 1, 2005. Although progress has been made in 

implementing best practices in the development of the IT operations and 

maintenance budget, until these actions are completely implemented IRS 

will not be able to ensure that its request is adequately supported.

Conclusions As IRS shifts its priorities to enforcement and faces tight budgets for 

service, the agency will be challenged to maintain the gains it has made in 

taxpayer service. In order to avoid a “swinging pendulum,” where 

enforcement gains are achieved at the cost of taxpayer service and vice 

versa, IRS and the Congress would benefit from a set of agreed-upon longterm goals. Long-term goals would provide a framework for assessing 

budgetary tradeoffs between taxpayer service and enforcement and 

whether IRS is making satisfactory progress towards achieving those goals. 

Similarly, long-term goals could help identify priorities within the taxpayer 

service and enforcement functions. For example, if the budget for taxpayer 

service were to be cut and efficiency gains did not offset the cut, long-term 

24 GAO-02-704. 
Page 25 GAO-05-566 

goals could help guide decisions about whether to make service cuts across 

the board or target selected services. To its credit, IRS has been developing 

a set of long-term goals, so we are not making a recommendation on goals. 

However, we want to underscore the importance of making the goals 

public in a timely fashion, as IRS has planned. The Congress would then 

have an opportunity to review the goals and start using them as a tool for 

holding IRS accountable for performance. 

In addition, the Congress would benefit from more information about the 

short-term impacts of the 2006 budget request on taxpayers. The 2006 

budget request cites a need for reducing the hours of telephone service and 

scaling back walk-in assistance but provides little additional detail. 

Without more detail about how taxpayers will be affected, it is difficult to 

assess whether the 2006 proposed budget would allow IRS to achieve its 

stated intent of both maintaining a high level of taxpayer service and 

increasing enforcement.

BSM and related initiatives such as electronic filing hold the promise of 

delivering further efficiency gains that could offset the need for larger 

budget increases to fund taxpayer service and enforcement. Today, 

taxpayers have seen payoffs from BSM; however, the program is still high 

risk and budget reductions have caused substantive program changes. IRS 

has recognized it is time to revisit its long-term BSM strategy and is 

currently refocusing the program. As we did with long-term goals above, 

we want to underscore the importance of timely completion of the revision 

of the BSM strategy. 

Recommendation In a related statement (GAO-05-416T), GAO recommended that the 

Commissioner of Internal Revenue supplement the 2006 budget request 

with more detailed information on how proposed service reductions would 

impact taxpayers. 
Page 26 GAO-05-566 

Appendix I

Description of IRS’s Proposed Budget 

Structure ApendxiI

IRS's proposed new budget structure as depicted in figure 7 combines the 

three major appropriations that the agency has had in the past—

Processing, Assistance, and Management; Tax Law Enforcement; and 

Information Systems into one appropriation called Tax Administration and 

Operations. The Business Systems Modernization and Health Insurance 

Tax Credit Administration appropriations accounts remain unchanged. 

The Tax Administration and Operations appropriation is divided among 

eight critical program areas. These budget activities focus on Assistance, 

Outreach, Processing, Examination, Collection, Investigations, Regulatory 

Compliance, and Research. According to IRS, as it continues to move 

forward with developing and implementing this new structure, these 

program areas and the associated resource distributions will be refined to 

provide more accurate costing.

IRS reported that the new budget structure has a more direct relationship 

to its major program areas and strategic plan. We did not evaluate IRS's 

proposed budget structure as part of this engagement because it was not 

within the scope of our review. However, we have recently completed a 

study on the administration's broader budget restructuring effort. In that 

study we say that, going forward, infusing a performance perspective into 

budget decisions may only be achieved when the underlying information 

becomes more credible and used by all major decision makers. Thus, the 

Congress must be considered a partner. In due course, once the goals and 

underlying data become more compelling and used by the Congress, 

budget restructuring may become a better tool to advance budget and 

performance integration.1

 

1

 For a more detailed discussion, see GAO, Performance Budgeting: Efforts to Restructure 

Budgets to Better Align Resources with Performance, GAO-05-117SP (Washington, D.C.: 

February 2005). 
Appendix I

Description of IRS’s Proposed Budget 

Structure

Page 27 GAO-05-566 

Figure 5: IRS’s Proposed Budget Structure

Source: GAO representation of IRS information.

Processing, Assistance, and 

Management

Pre-filing Assistance and Education

Filing and Account Services

Shared Services Support

General Management and Administration

Tax Law Enforcement

Compliance Services

Research and Statistics of Income

Earned Income Tax Credit

Information Systems

Information Systems Improvement Projects

Information Services

Business Systems Modernization Business Systems Modernization

Health Insurance Tax Credit 

Administration

Health Insurance Tax Credit 

Administration

Current IRS Appropriations Proposed IRS Appropriations

Tax Administration and Operations

Assistance

Outreach

Processing

Examination

Collection

Investigations

Regulatory Compliance

Research
Page 28 GAO-05-566 

Appendix II

BSM Project Life Cycle Cost/Schedule 

Variance and Benefits Summary ApendxiI

The table below shows the life-cycle variance in cost and schedule 

estimates for completed and ongoing Business Systems Modernization 

(BSM) projects, based on data contained in IRS's expenditure plans. These 

variances are based on a comparison of IRS's initial and revised (as of July 

2004) cost and schedule estimates to complete initial operation1

 or full 

deployment2

 of the projects. 

Table 4: BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary 

1

 Initial operation refers to the point at which a project is authorized to begin enterprisewide 

deployment.

2

 Full deployment refers to the point at which enterprisewide deployment has been 

completed and a project is transitioned to operations and support.

Project

Cost

variance

(in thousands)

Reported/

revised

estimated cost

(in thousands)

Schedule

variance

(in months)

Reported/revised 

estimated

completion date Reported IRS/taxpayer benefits

Completed 

projects

Security and 

Technology 

Infrastructure 

Release 1

+$8,450 $45,401 +5 1/31/02

(initial operation)a

Provides infrastructure for secure 

telephony and electronic interaction 

among IRS employees, tax 

practitioners, and taxpayers.

Customer 

Communications 

2001

+14,562 60,762 +9 2/26/02

(full deployment)

Improves telecommunications 

infrastructure, including telephone 

call management, call routing, and 

customer self-service applications.

Customer 

Relationship 

Management Exam 

-721 9,245 +3 9/30/02 

(full deployment)

Provides commercial, off-the-shelf 

software to IRS revenue agents to 

allow them to accurately compute 

complex corporate transactions.

Human Resources 

Connect 

Release 1

+200 10,200 0 12/31/02

(initial operation)a

Allows IRS employees to access 

and manage their human resources 

information online.

Internet Refund/ 

Fact of Filing 

+12,923 26,432 +14 9/26/03

(full deployment)

Provides instant refund status 

information and instructions for 

resolving refund problems to 

taxpayers with Internet access.

Modernized 

e-File Release 1

+21,057 50,303 +6.5 5/31/04

(initial operation)a

Provides initial electronic filing 

capability for large corporations, 

small business, and tax-exempt 

organizations.
Appendix II

BSM Project Life Cycle Cost/Schedule 

Variance and Benefits Summary

Page 29 GAO-05-566 

Source: GAO analysis of IRS data.

a

Information on the costs and schedule for the full-deployment stage of these projects was not 

available in the BSM expenditure plans.

Ongoing projects

Modernized 

e-File Release 2

0 16,325 0 9/30/04

(initial operation)

Provides additional functionality to 

support corporate electronic filing 

and other capabilities, including 

required public access to filed 

returns for tax- exempt 

organizations.

Modernized 

e-File Release 3

+5,300 27,175 0 3/31/05

(initial operation)

Provides additional functionality to 

support electronic filing for taxexempt organizations and other 

capabilities, including the interface 

with state retrieval systems.

e-Services +102,271 148,820 +18 4/30/05

(full deployment)

Provides a Web portal and other eServices to promote the goal of 

conducting most IRS transactions 

with taxpayers and tax practitioners 

electronically.

Customer Account 

Data Engine – 

Individual Master 

File Release 1

+118,129 182,774 +30 6/30/05

(full deployment)

Provides the modernized database 

foundation to replace the existing 

individual master file processing 

systems. Facilitates faster refund 

processing and more timely 

response to taxpayer inquiries for 

Form 1040EZ filers. 

Integrated Financial 

System Release 1

+73,710 173,580 +15 6/30/05

(full deployment)

Provides a single general ledger for 

custodial and financial data and a 

platform to integrate core financial 

data with budget, performance, and 

cost-accounting data.

Custodial 

Accounting Project 

Release 1

+91,789 138,950 +33 11/01/05

(full deployment)

Provides integrated tax operations 

and internal management 

information to support evolving 

decision analytics, performance 

measurement, and management 

information needs.

(Continued From Previous Page)

Project

Cost

variance

(in thousands)

Reported/

revised

estimated cost

(in thousands)

Schedule

variance

(in months)

Reported/revised 

estimated

completion date Reported IRS/taxpayer benefits
Page 30 GAO-05-566 

Appendix III

How IRS Allocated Expenditures FTEs in 

Fiscal Year 2004 ApendxiI

Figures 6 and 7 illustrate how the Internal Revenue Service (IRS) allocated 

expenditures and full-time equivalents (FTEs) in fiscal year 2004. Figure 8 

shows total expenditures. The percentage of expenditures devoted to 

contracts decreased from 9 percent in 2002 to 5 percent in 2004, because of 

fewer private contracts. The percentage of expenditures devoted to other 

non-labor costs increased from 8 percent in 2002 to 12 percent in 2004, 

according to IRS officials, due to of increases in miscellaneous costs. 

Figure 6: IRS expenditures in fiscal year 2004

Note: Numbers do not add to the total and percentages do not add to 100 percent due to rounding.

Figure 9 shows IRS’s total FTEs. Since 2002, FTEs have decreased slightly 

from 99,180 in 2002 to 99,055 in 2004. We previously reported that 

processing FTEs declined 1 percentage point between 2002 and 2003. 

Between 2003 and 2004, IRS’s allocation of FTEs remained similar but with 

a 1 percent increase in enforcement activities in conducting examinations, 

and in management and other services. 

Labor

$7.2 billion

Other nonlabor 

costs

$1.31 billion

Rent

$.67 billion

Equipment

$.54 billion

Contracts

$.54 billion

5% 3%

Communications 

and utilities

$.37 billion

5%

6%

12%

68%

Source: GAO analysis of IRS data.

Total 

expenditures

$10.7 billion
Appendix III

How IRS Allocated Expenditures FTEs in 

Fiscal Year 2004

Page 31 GAO-05-566 

Figure 7: How IRS spent 99,055 FTEs in fiscal year 2004

Providing management and other services

11,333 FTEs

Maintaining information systems

7,323 FTEs

Offering other taxpayer assistance

6,152 FTEs, including:

2,238 for face-to-face assistance

1,469 for publication/education

2,445 for Web site and other assistance

Collecting taxes

13,878 FTEs, including:

7,442 for field collections

6,436 for electronic collections

Conducting examinations

23,021 FTEs, including:

17,008 for field examinations

4,057 for electronic examinations

1,956 for document matching

Processing tax returns

13,658 FTEs

Other compliance

9,276 FTEs, including:

3,822 for criminal investigation

3,139 for appeals and litigation

2,315 for taxpayer advocate case processing 

and other actions

Assisting taxpayers via telephone, e-mail, 

and correspondence

14,414 FTEs

14%

23%

14%

9%

7%

15%

6%

Source: GAO analysis of IRS data.

12%

13,658 FTEs processing tax returns

20,566 FTEs assisting taxpayers

46,175 FTEs ensuring compliance with the tax law

18,656 FTEs supplying program support

()
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