a

GAO

United States General Accounting Office

Report to the Commissioner of Internal 

Revenue

June 2002 INTERNAL REVENUE 

SERVICE

Improving Adequacy 

of Information 

Systems Budget 

Justification

GAO-02-704
Page i GAO-02-704 Information Systems Budget Justification

Contents

Letter 1

IRS’s Information Systems Request for Operations and Maintenance 

Is Not Adequately Justified 1

Recommendation for Executive Action 3

Agency Comments 3

Appendixes

Appendix I: Comments from the Internal Revenue Service 5

Appendix II: GAO Contact and Staff Acknowledgments 9

GAO Contact 9

Staff Acknowledgments 9

Abbreviations

IRS Internal Revenue Service

IS information systems

IT information technology
Page 1 GAO-02-704 Information Systems Budget Justification

United States General Accounting Office

Washington, D.C. 20548

A

June 28, 2002 Letr

The Honorable Charles O. Rossotti

Commissioner of Internal Revenue

Dear Mr. Rossotti:

On April 9, 2002, we testified before the Subcommittee on Oversight, House 

Committee on Ways and Means, on the Internal Revenue Service’s (IRS) 

fiscal year 2003 budget request.1

 In brief, we reported that although IRS had 

adequately justified its $450 million Business Systems Modernization 

request, it did not develop its $1.63 billion information systems (IS) 

operations and maintenance request in accordance with the best practices 

of leading private- and public-sector information technology (IT) 

organizations. This report officially transmits both the results we reported 

and the recommendation we made to you in our testimony. Before our 

testimony, we discussed the results of our work with IRS officials, and they 

agreed with our findings and recommendation. We performed our work 

from February through April 2002, in accordance with generally accepted 

government auditing standards. 

IRS’s Information 

Systems Request for 

Operations and 

Maintenance Is Not 

Adequately Justified

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.

1

U.S. General Accounting Office, Internal Revenue Service: Assessment of Budget Request 

for Fiscal Year 2003 and Interim Results of 2002 Tax Filing Season, GAO-02-580T

(Washington, D.C.: Apr. 9, 2002).
Page 2 GAO-02-704 Information Systems Budget Justification

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 the Office of Management 

and Budget and us.2

 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 very 

substantial operations and maintenance budget requests. These 

approaches also provide a way to hold IT managers accountable for 

operations and maintenance spending and the ongoing efficiency and 

efficacy of existing systems. 

IRS did not develop its IS request in accordance with these best practices 

of leading organizations. In particular, the largest elements of IRS’s budget 

request are not projects or systems. Rather, they are requests for staffing 

levels or other services. For example, IRS is requesting $240 million for 

staff and equipment supporting operations and maintenance of desktop 

computers agencywide, as well as $111 million for staff and equipment 

supporting its major computing centers’ operations. Further, the agency is 

requesting $266 million for telecommunications services contracts. Taken 

together, these three initiatives constitute about 38 percent of the total 

$1.63 billion being requested for operations and maintenance, but the 

budget request gives no indication regarding how these initiatives are 

allocated to systems. In addition, in developing these requests, IRS did not 

identify and assess the relative costs, benefits, and risks of specific projects 

or systems in these areas. Instead, according to IRS officials responsible for 

developing the IT operations and maintenance budget, they simply took 

what was spent last year in these categories and added the money to fund 

cost-of-living and salary increases. 

These IRS officials attributed the gap between IRS’s practices and those 

followed by leading organizations to the lack of an adequate cost 

accounting system, cultural resistance to change, and a previous lack of 

management priority. To better justify future budget requests, these 

officials said that they have assessed the strengths and weaknesses of IRS’s 

budgeting and investment management processes against our IT 

investment management framework3

 and found significant weaknesses in 

2

See, for example, U.S. General Accounting Office, Information Technology Investment 

Management: A Framework for Assessing and Improving Process Maturity, Exposure 

Draft, GAO/AIMD-10.1.23 (Washington, D.C.: May 2000, Version 1).

3

GAO/AIMD-10.1.23.
Page 3 GAO-02-704 Information Systems Budget Justification

15 critical areas. To address the weaknesses, IRS is currently developing 

capital planning guidance that is based on our IT investment management 

framework. This guidance is to be issued by late summer 2002, but a 

schedule for implementing it had yet to be determined. In addition, IRS had 

adopted and was in the process of implementing a cost model that is to 

enable it to account for the full costs of operations and maintenance 

projects and determine how effectively IRS projects are achieving program 

goals and mission needs. IRS plans to have the cost model in place and 

operational by June 30 of this year so that it can validate its fiscal year 2003 

IS appropriation request and begin using the cost model to develop the 

fiscal year 2004 request.

Although IRS has initiated actions to address the previously noted 

weaknesses, we are concerned about whether these actions will be 

implemented in time to have meaningful impact on formulation of the fiscal 

year 2004 budget request. For example, IRS had not yet developed a plan 

and schedule for implementing its IT capital planning guidance. In addition, 

IRS officials told us they are already beginning the process to develop the 

fiscal year 2004 budget. Consequently, until IRS overcomes its obstacles, 

the agency’s future IS appropriation requests, like its fiscal year 2003 

request, will not be adequately justified. 

Recommendation for 

Executive Action

We recommend that the Commissioner of Internal Revenue direct the 

Budget Director, Modernization, Information Systems, and Security 

Services, to prepare IRS’s fiscal year 2004 IS budget request in accordance 

with leading organizations’ best practices. At a minimum, this should 

include (1) adopting these best practices as an explicit priority and (2) 

employing these practices in time for use in developing the fiscal year 2004 

budget request. 

Agency Comments In commenting on a draft of this report, the Commissioner of Internal 

Revenue agreed with our recommendation, adding that IRS understands its 

importance and is taking actions to fully implement it. The Commissioner 

described IRS’s ongoing and planned efforts relating to implementing best 

practices and addressing our recommendation, including specifying 

milestones for when these initiatives will be fully implemented. The 

Commissioner’s written comments are reprinted in appendix I.
Page 4 GAO-02-704 Information Systems Budget Justification

As you know, 31 U.S.C. 720 requires the head of a federal agency to submit 

a written statement of the action taken on our recommendation to the 

Senate Committee on Governmental Affairs and the House Committee on 

Government Reform not later than 60 days from the date of this report. A 

written statement must also be submitted to the House and Senate 

Committees on Appropriations with the agency’s first request for 

appropriations made more than 60 days after the date of this report.

We are sending copies of this report to the Chairmen and Ranking Minority 

Members of Senate and House committees and subcommittees that have 

appropriations, authorization, and oversight responsibilities for IRS. We are 

also sending copies to the Secretary of the Treasury, the Chairman of the 

IRS Oversight Board, and the Director of the Office of Management and 

Budget. In addition, this report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

Should you or your staff have questions on matters discussed in this report, 

please contact me at (202) 512-3439. I can also be reached by e-mail at 

hiter@gao.gov. A GAO contact and key contributors to this report are listed 

in appendix II.

Sincerely yours,

Randolph C. Hite

Director, Information Technology Architecture

and Systems Issues
Page 5 GAO-02-704 Information Systems Budget Justification

Appendix I

Comments from the Internal Revenue Service ApApenednxidexiIs
Appendix I

Comments from the Internal Revenue Service

Page 6 GAO-02-704 Information Systems Budget Justification
Appendix I

Comments from the Internal Revenue Service

Page 7 GAO-02-704 Information Systems Budget Justification
Appendix I

Comments from the Internal Revenue Service

Page 8 GAO-02-704 Information Systems Budget Justification
Page 9 GAO-02-704 Information Systems Budget Justification

Appendix II

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Gary N. Mountjoy, (202) 512-6367

Staff 

Acknowledgments

In addition to the individual named above, other key contributors to this 

report were Bernard R. Anderson, Michael P. Fruitman, Timothy D. 

Hopkins, and Ona M. Noble. 

(310237)
GAO’s Mission The General Accounting Office, the investigative arm of Congress, exists to 

support Congress in meeting its constitutional responsibilities and to help improve 

the performance and accountability of the federal government for the American 

people. GAO examines the use of public funds; evaluates federal programs and 

policies; and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of accountability, 

integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail this 

list to you every afternoon, go to www.gao.gov and select “Subscribe to daily

E-mail alert for newly released products” under the GAO Reports heading.

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. A check 

or money order should be made out to the Superintendent of Documents. GAO 

also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single 

address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Public Affairs Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00