GAO-01-903R Follow-up to May 8, 2001, Hearing

United States General Accounting Office

Washington, DC 20548

June 29, 2001

The Honorable William M. Thomas

Chairman, Committee on Ways and Means

House of Representatives

The Honorable Charles E. Grassley

Ranking Minority Member, Committee on Finance

United States Senate

The Honorable Amo Houghton

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Subject: Follow-up to the May 8, 2001, Hearing Regarding the IRS Restructuring Act’s Goals

and IRS Funding

The May 8, 2001, annual hearing convened by the Joint Committee on Taxation to review the

Internal Revenue Service (IRS) Restructuring and Reform Act of 19981

 reemphasized the

importance of the act’s goals. By passing the act, Congress signaled strong concern that IRS

had been overemphasizing revenue production and compliance at the expense of fairness and

consideration of taxpayer interests. Accordingly, the act mandated that the IRS mission

more strongly emphasize serving the public and meeting taxpayers’ needs.

In a letter following the hearing, you asked whether, 3 years into the act’s implementation, its

goals are realistic, and if not, whether the act should be changed. You also asked us about

areas of disagreement at the hearing among the IRS Oversight Board, the Treasury Inspector

General for Tax Administration (TIGTA), and us. We are basing our response primarily on

work we did for the hearing, other recent testimony, and our discussions with officials from

the Oversight Board and TIGTA about the disagreements.

In summary, the IRS Restructuring Act’s goals of meeting taxpayers’ needs while ensuring

compliance with the tax laws require a massive modernization of IRS. These changes present

major management challenges and will require considerable time to successfully implement.

While IRS officials believe they have complied with the act’s requirements, they are still

learning how to effectively manage in the new environment. Therefore, we believe it is

premature to consider significant changes to the act. On the matter of differences among the

Oversight Board, TIGTA, and us, there are some differences with respect to specific IRS

funding issues.

 1

P.L. 105-206, July 22, 1998.
Page 2 GAO-01-903R Follow-up to May 8, 2001, Hearing

No Demonstrated Need to Make Fundamental Changes to the Goals of the Act

The IRS Restructuring Act presents very significant management challenges to IRS. The act’s

overall goal of better balancing revenue production and compliance with fairness and

taxpayer service requires modernizing all facets of IRS’ operations, from business processes

to performance management and information systems. Similarly, the act’s requirements for

revising programs such as offer-in-compromise and innocent spouse, and changing

procedures such as enhancing taxpayer rights, are substantial changes that continue to

challenge IRS’ capacity to manage change without disrupting its core operations.

IRS has made both strategic and specific program changes in response to the act. For

instance, it has revised its mission statement and developed new goals and objectives;

implemented a new organization structure focused on different types of taxpayers to better

carry out its mission and goals; and implemented new taxpayer rights and protections, such

as enhanced due process rules and expansions of the offer-in-compromise and innocent

spouse programs. IRS has also made important progress in implementing systems

modernization management controls and capabilities.

However, as we indicated in our May 8 testimony, IRS is struggling with the management of

many of these changes. The offer-in-compromise program has a growing backlog of cases.

IRS’ performance in important areas of taxpayer service, such as telephone assistance, is not

at the level that IRS or Congress expects. Enforcement trends continue to be troubling.

Financial information is not available to IRS managers on a timely basis for use in day-to-day

decisionmaking. Some systems modernization projects are passing critical milestones

without having certain essential management controls in place and functioning.

Whether IRS can achieve the goals set by Congress in the IRS Restructuring Act with current

resources is an open question. The answer will depend, to an important extent, on how well

IRS can manage its resources. Currently, IRS managers do not adequately understand the

factors that affect performance in many areas, and IRS is still developing its new

performance management system. Until IRS better develops these evaluation and

performance management capabilities, it will continue to struggle with achieving the

strategic goals of improving taxpayer service and compliance and managing specific

programs, such as offer-in-compromise and innocent spouse. And until then, it is difficult to

know enough about the efficiency of IRS to make well-informed judgments about altering the

act’s goals or adjusting IRS resource levels.

As we said on May 8, performance evaluation--the collection of data on performance and the

analysis of those data to determine the factors that explain performance--is a key part of

performance management. IRS managers do not consistently evaluate the performance of

their programs to make decisions about how to improve performance. In some cases,

relevant, accurate data are not available on a routine basis to support program evaluations.

Financial information, such as program and project cost data, is one example. In other cases,

analyses of past performance are not complete enough to give managers an understanding of

how to improve performance. A case in point is the decline in the productivity of telephone

assistors: IRS has studied the time assistors spend handling a call, but not other segments of

assistors’ time, including the time waiting to receive a call.

IRS has continued to make progress in revamping its performance management system, but a

results-oriented approach is not yet routine at all levels. IRS’ new performance management

system is most fully developed at the agencywide level. However, as we discussed on May 8,

the new system is less developed at the division level and is weakest at the front line, where

interactions with taxpayers occur. In the long run, if managers at all levels consistently apply

results-oriented performance management skills in their day-to-day work by routinely
Page 3 GAO-01-903R Follow-up to May 8, 2001, Hearing

gathering and using data to define goals, assess progress, and design improvements, IRS will

be better able to achieve the transformation it and Congress desire. Congress will also be in

a better position to monitor incremental IRS progress in what necessarily will be a long-term

effort.

Making a results-oriented performance management approach routine at all levels of IRS

requires a change in management culture. Key steps that remain in this effort include

developing a measure of voluntary compliance with the tax laws; developing division-level

and smaller unit performance goals that are specific, measurable, and results-oriented; and

revamping the evaluation system for frontline employees—areas that we have reported on

and will continue to report on.

Given that IRS is still learning to better manage its resources to achieve what will be a longterm transformation, we conclude that it would be premature to make fundamental changes

to the goals of the IRS Restructuring Act. Similarly, based on our work to date, we have no

recommendations for less fundamental changes to the goals. However, we recognize that

others, including IRS, TIGTA, or the Oversight Board, may be able to justify some

adjustments to specific provisions of the act if they promote administrative efficiency or

further achieving the act’s goals. We also believe that IRS must be held accountable for

developing the stronger performance evaluation and results-oriented performance

management capabilities needed to better manage its resources. To this end, continued

congressional oversight of IRS’ efforts to modernize is key.

Some Disagreements Over Specific IRS Funding Issues

From discussions we have had with Oversight Board and TIGTA officials since the May 8

hearing, we have concluded that there were some disagreements among us over specific IRS

funding issues discussed at the hearing.

One area of disagreement was over fiscal year 2002 funding for IRS business systems

modernization. The Oversight Board recommended that $450 million be appropriated to the

Business Systems Modernization (BSM) account in fiscal year 2002--$53 million more than

IRS sought or justified in its budget submission. Moreover, after the budget submission, IRS

decided to slow down its projects so it would not exceed its capacity to effectively manage

modernization. Given these facts, in our view, appropriation of the additional $53 million in

fiscal year 2002 was not clearly justified. Regardless, even if Congress does appropriate the

additional $53 million, IRS’ past appropriation acts require such BSM spending to be

submitted to Congress via an expenditure plan before BSM funds can be obligated. This

provides a follow-on control mechanism to ensure that appropriated funds are effectively

managed and spent.

A second area of disagreement was the need for a fiscal year 2002 budget increase to cover

inflationary increases in nonpay expenditures and certain other costs. The Oversight Board

recommended additional funding ($137 million, or about 1.5 percent of IRS’ proposed budget)

for these costs. The proposed administration budget for IRS recognized unfunded costs,

although the dollar amount was lower ($57 million), but indicated they could be covered

through improved resource management.2

 The consequences of not increasing IRS’ budget to

fund these costs are unclear. We said at the May 8 hearing that it would be difficult for us to

support a budget increase for these costs without some facts from IRS showing the

consequences of not getting the increase.

 2

See Fiscal Year 2002 Budget Request for the Internal Revenue Service (GAO-01-698R, May 1, 2001).
Page 4 GAO-01-903R Follow-up to May 8, 2001, Hearing

An area where the Oversight Board recommended a budget increase for IRS, but we took no

position at the hearing, was the need for funding such improvement projects as upgrading

laptop computers. The Board recommended a $137 million budget amount, $97 million more

than the $40 million IRS requested. We have not assessed the need for this funding and thus

are unable to describe the consequences if IRS were not to receive it.

During the hearing, the Oversight Board emphasized the importance of 2-year funding for the

BSM account. We have no disagreement with the Board on this issue. We believe that, given

the BSM control mechanism described earlier, providing multiyear funding that has been

justified could be an effective way to provide funding stability and avoid unnecessary

interruptions in long-term information technology projects.

- - - - -

As agreed with your offices, unless you publicly announce its contents earlier, we plan no

further distribution of this letter until 30 days from the date on the letter. At that time, we

will send copies to the Ranking Minority Member, Committee on Ways and Means; the

Chairman, Committee on Finance; the Ranking Minority Member, Subcommittee on

Oversight, Committee on Ways and Means; the Secretary of the Treasury; the Commissioner

of Internal Revenue; the Chairman of the IRS Oversight Board; and the Treasury Inspector

General for Tax Administration. In addition, we will make copies available to others on

request. The letter will also be available on our home page at http://www.gao.gov.

Major contributors to this letter were Lawrence Korb and Gary Mountjoy. If you have any

questions, you may contact Michael Brostek or me on (202) 512-9110.

Sincerely yours,

James R. White

Director, Tax Issues

(440061)