a

GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Oversight, Committee on 

Ways and Means, House of Representatives

For Release on Delivery

Expected at 9 a.m. EDT

Tuesday, April 8, 2003

INTERNAL REVENUE 

SERVICE

Assessment of Fiscal Year 

2004 Budget Request and 

2003 Filing Season 

Performance to Date

Statement of James R. White

Director, Tax Issues

Robert F. Dacey

Director, Information Technology Systems Issues

GAO-03-641T
IRS is requesting $10.4 billion and 100,043 FTEs, a dollar increase of about 5 

percent over the fiscal year 2003 request. The 2004 budget request, like 

other recent requests, identifies compliance as one of IRS’s top priorities for 

additional resources. As shown below, IRS intends to fund some program 

enhancements from the requested budget increase and internal savings. 

Several factors, including lowered savings projections since the budget 

request was prepared, raise questions about IRS’s ability to achieve all the 

savings and shift resources to compliance as planned. IRS’s recent history 

raises the same questions, in part, because unbudgeted expenses, such as 

pay raises, have absorbed budget increases. 

IRS is requesting $2.1 billion in information technology. This includes $429 

million for the agency’s multiyear capital account that funds contractor costs 

for the Business Systems Modernization program, and $1.67 billion for 

information systems, primarily for operations and maintenance. In response 

to GAO’s recommendation last year, IRS has begun to implement an 

information technology management process patterned after its systems 

modernization program. Until the process is fully implemented, IRS will have 

limited ability to develop supportable information systems budget requests. 

IRS’s 2003 filing season performance has improved over last year. For 

example, IRS’s telephone access has improved and the Web site has seen 

increased use. Such improvements represent a payoff from IRS’s ongoing 

systems modernization investments and wider management improvements. 

Although IRS has not succeeded in reallocating staff to one of its priority 

needs, compliance, there will likely be increased potential for such 

reallocation as modernization proceeds. This will present Congress, in its 

oversight and appropriations roles, with significant opportunities to weigh in 

on IRS’s overall strategy for better accomplishing its mission. 

IRS’s Proposed Funding for Program Enhancements 

$166 million from 

internal savings

$288 million 

from budget 

increase

$ 454 million

in proposed 

program 

enhancements

$10 billion for current operations

$10.4 billion budget request

Source: IRS data. 

The Internal Revenue Service (IRS) 

is responsible for collecting most 

of the funds that pay for the federal 

government. For 2003, IRS expects 

to process 130 million individual 

income tax returns, issue 99 million 

refunds, receive 100 million 

telephone calls, and assist 4 million 

taxpayers face-to-face at IRS and 

volunteer offices. Most of these 

interactions with taxpayers occur 

during the January through April 

tax filing season. 

GAO was asked by the 

Subcommittee to assess the 

likelihood of IRS allocating more 

resources to a key priority, 

compliance; whether proposed 

spending on computer systems is 

justified; and filing season 

performance. 

GAO is not making any 

recommendations. However, as 

GAO noted last year, until IRS 

incorporates best practices in 

preparing its information systems 

budget, it will not be able to ensure 

that the information system 

operations and maintenance 

request is adequately supported. 

www.gao.gov/cgi-bin/getrpt?GAO-03-641T.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Jim White at 

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

Highlights of GAO-03-641T, a testimony 

before the Subcommittee on Oversight, 

Committee on Ways and Means, House of 

Representatives 

April 8, 2003

INTERNAL REVENUE SERVICE

Assessment of Fiscal Year 2004 Budget 

Request and 2003 Filing Season 

Performance to Date 
Page 1 GAO-03-641T 

Mr. Chairman and Members of the Subcommittee:

We are pleased to participate in the Subcommittee’s inquiry into Internal 

Revenue Service’s (IRS) fiscal year 2004 budget request and 2003 tax filing 

season performance.

With its mission to “provide America’s taxpayers with top quality service by 

helping them understand and meet their tax responsibilities and by 

applying the tax law with integrity and fairness to all,” IRS is responsible 

for collecting most of the funds that pay for the federal government. To 

carry out its mission, IRS has a budget of about $10 billion and staff of 

about 100,000 full time equivalents (FTE). For 2003, IRS expects to process 

130 million individual income tax returns, issue 99 million refunds, receive 

100 million telephone calls, and assist 4 million taxpayers face-to-face at 

IRS and volunteer1

 offices. 

As you requested, our statement discusses both IRS’s 2004 budget request 

and its 2003 filing season performance. With respect to the budget, we 

assessed the likelihood that IRS will be able to allocate more resources to 

one of its key priorities, compliance, and whether the proposed spending 

on some computer systems is justified. With respect to the filing season, we 

assessed IRS’s performance in processing returns and providing assistance 

to taxpayers. 

Our assessment of the budget request is based on a comparative analysis of 

IRS’s fiscal year 2003 and 2004 budget requests, supporting documentation, 

and interviews with IRS officials. Our assessment of the filing season is 

based on a comparison of IRS’s performance this year to last, site visits to 

IRS processing centers and walk-in sites, and interviews with IRS and 

Treasury Inspector General for Tax Administration (TIGTA) officials, tax 

preparers, and other external stakeholders. We also reviewed IRS’s Web 

site for usability and accessibility. 

In summary, our assessment of IRS’s 2004 budget request shows that: 

• IRS is requesting 100,043 FTEs and $10.4 billion, an increase of about 5 

percent over its fiscal year 2003 request. The 2004 budget request is one 

of many that have identified compliance activities as among IRS’s top 

1

These offices use IRS-trained volunteers to help prepare basic tax returns for taxpayers 

with special needs.
Page 2 GAO-03-641T 

priorities for receiving additional resources. These additional resources 

were to be funded from budget increases, internally generated savings, 

or both. Savings projections have been revised downward since the 2004 

budget request was prepared, which raises questions about IRS’s ability 

to achieve all the savings and shift resources to compliance as planned. 

Further, IRS’s recent history shows that it has been unable to increase 

resources in compliance, despite having made it a priority in budget 

requests. In fact, for the most recent three full fiscal years—2000, 2001 

and 2002—compliance resources have declined slightly. Reasons for this 

include unfunded expenses consuming budget increases.

• Another priority area for IRS is Information Technology (IT). IRS is 

requesting about $2.1 billion and 7,986 staff years in information 

technology resources for fiscal year 2004. This includes (1) $429 million 

for the agency’s multiyear capital account that funds contractor costs 

for the BSM program and (2) about $1.67 billion and 7,735 staff years for 

information systems, of which $1.62 billion is for operations and 

maintenance. In preparing its fiscal year 2004 budget request for the 

operations and maintenance of information systems, IRS began to 

implement an information technology portfolio management process 

patterned after the one used for the BSM program. However, until IRS 

fully implements planned process improvements, its ability to develop 

supportable information systems budget requests will remain limited.

Our assessment of the 2003 filing season to date shows that:

• IRS’s 2003 filing season performance has improved over last year, based 

on the data we reviewed in key filing season activities—paper and 

electronic processing, telephone assistance, IRS’s Web site, and walk-in 

assistance. In particular, access to IRS’s telephone assistors has 

improved and Web site usage has increased. While we cannot quantify 

the connection between these results and IRS’s ongoing systems 

modernization efforts, the improvement in filing season performance, in 

part, represents a payoff from systems modernization. 
Page 3 GAO-03-641T 

IRS’s Fiscal Year 2004 

Budget Request 

Includes Compliance, 

Taxpayer Service, and 

Information Systems as 

Priorities

For fiscal year 2004, IRS is requesting $10.4 billion, an increase of 5.3 

percent over fiscal year 2003 requested levels, and 100,043 FTEs. IRS’s 2004 

budget request is its second in a row to propose increased spending for 

higher priority areas that would be funded, in part, with internal savings 

redirected from other areas. Specifically, IRS proposes to devote an 

additional $454 million and 3,033 more FTEs to enhance programs, 

primarily in compliance and some customer service areas. As shown in 

figure 1, $166 million of the enhancements would be funded from internal 

savings with the remainder funded from the budget increase. 

Figure 1: IRS’s Proposed Funding for Program Enhancements 

As we did in last year’s testimony on IRS’s 2003 budget request, we 

commend IRS for identifying savings to be reinvested in operations to 

improve IRS performance. This approach implements a key principal of 

IRS’s long-term modernization effort. Under this approach, the 

reengineering of IRS’s work processes—much of which is dependent on 

investments in computer modernization—would automate or eliminate 

work, improve productivity, and free staff time that could then be 

redirected to higher priority customer service and compliance activities. 

We provide some context for understanding the 2004 budget request in 

figures 2 and 3 as shown in appendix I. In those figures, we illustrate how 

IRS allocated expenditures and staff resources in fiscal year 2002, the most 

recently completed year. 

$166 million 

from internal

savings 

$288 million

from budget

increase 

$ 454 million

in proposed

program 

enhancements 

$10 billion for current operations

Source: IRS data

.

$10.4 billion budget request
Page 4 GAO-03-641T 

Current Projections and 

Recent History Raise 

Questions about Whether 

IRS Will Realize Some 

Priority Resource 

Reallocations

Revised projections developed since the 2004 budget request was prepared 

raise questions about IRS’s ability to achieve all the savings projected and 

shift resources to compliance as planned. In addition, some projected 

savings are based on reengineering efforts that are not well defined. 

Further, IRS’s recent history also shows that it has been unable to increase 

resources in the compliance area despite having made it a priority in past 

budget requests. In fact, for the most recent 3 full fiscal years—2000, 2001, 

and 2002—compliance resources have declined slightly. Reasons for this 

decline include unfunded expenses consuming budget increases and 

workload increases in other essential operations.

IRS Has Revised Some Savings 

Shown in Its 2004 Budget 

Request 

IRS has revised the savings associated with several reengineering efforts 

identified in the 2004 budget request. Revisions this far in advance of the 

start of the fiscal year are not a surprise. They do indicate that there is 

some uncertainty associated with the budget request’s savings projections. 

Four of the seven most significant reengineering efforts—in terms of FTEs 

and dollars to be saved—will not achieve all of their projected savings 

because the efforts were based on assumptions that will not be realized, 

according to IRS data and officials. IRS now projects that the seven most 

significant efforts will save 1,073 FTEs and $60.5 million, down from 

original projections of 1,356 FTEs and $77.7 million. 

IRS provided different reasons for why all savings will not be achieved for 

the following individual efforts: 

• IRS’s effort to improve the efficiency of compliance support activities—

the single most significant effort—was partially dependent on IRS 

implementing individual compliance savings projects in 2003. This effort 

was projected to save 394 FTEs and almost $26 million. However, due in 

part to delays until 2004 to allow for additional testing, this effort is now 

expected to save about 30 percent of the original projections through 

the end of fiscal year 2004. 

• IRS’s effort to improve the efficiency of personnel services—the second 

most significant effort—depended in part on the functions of a new 

computer system to achieve most of its savings. This effort was 

originally projected to save 222 FTEs and $14.6 million. According to 

IRS officials, these functions will not be delivered on time due to 

schedule delays. IRS officials have not determined the impact of this 
Page 5 GAO-03-641T 

delay and are currently assessing other potential approaches to achieve 

savings in this area.

IRS officials said the remaining three of the seven most significant efforts 

will achieve all or more of their projected savings. For example, the effort 

to improve the efficiency of handling payments and returns, originally 

projected to save 121 FTEs and $4.6 million, is now expected to have more 

than double the savings, or 235 FTEs and $11.9 million, due to greater than 

expected productivity. However, according to IRS officials, even when their 

savings are combined, these three efforts will not save enough to offset the 

reduced savings from the other four. 

Reengineering efforts may not achieve all of their savings goals, in part, 

because of the long time lag between when IRS begins developing its 

budget request and when the fiscal year begins. As with most other federal 

agencies, IRS usually begins formulating its budget request about 18 

months before the start of the fiscal year and about 10 months before the 

President submits his budget to Congress. With planning beginning so far 

ahead of the budget’s actual execution, there are inevitably intervening 

events, such as implementation delays with computer systems, that make 

the assumptions upon which projections are based no longer realistic. 

Some 2004 Reengineering Efforts 

Are Not Well Defined

Some of the reengineering efforts listed in the 2004 budget request are not 

well defined, thus raising questions about whether they will achieve their 

savings goals. For example: 

• IRS still is reviewing its procedures to identify ways to make tax return 

processing more efficient. Although IRS projected this effort to save 203 

FTEs and $6.9 million, it has not yet identified the operational areas that 

will be reengineered. IRS officials said that the projected savings are 

based on a 2 percent efficiency increase, but they are currently 

determining how to achieve that goal. 

• The effort to improve the efficiency of personnel services noted above 

also included numerous competitive outsourcing assessments affecting 

several program areas that, according to the budget request, would 

result in a significant reduction of staffing. However, in response to our 

request for more information, IRS was unable to provide details on the 

type or number of specific assessments, program areas that would be 

affected, how this effort would lead to reduced staffing, or the amount 

of net savings expected.
Page 6 GAO-03-641T 

According to IRS budget officials, IRS uses its budget formulation process 

to establish productivity goals, although the responsible business units may 

not know specifically how savings will be achieved. Officials said that this 

approach encourages innovation in meeting performance goals while 

identifying ways to save FTEs and budget dollars. 

In Recent Years, Compliance 

Staffing Declined

Since 2001, IRS’s budget requests have made increasing compliance staff 

one of several key priorities. For example, in its 2001 budget request IRS 

asked for funding for the Staffing Tax Administration for Balance and 

Equity (STABLE) initiative, which was designed to provide additional 

staffing for examination, collections, and the new Tax Exempt and 

Government Entities Division. However, TIGTA recently reported data that 

showed an over 7 percent decline in compliance staff between 2000 and 

2002.2

There are several reasons for the decline, including increased workload 

and unfunded costs. In September 2002, the Commissioner attributed the 

decline in compliance staffing to increases in workload in other essential 

operations such as processing returns, issuing refunds, and answering 

taxpayer mail. In the most recently completed fiscal year, 2002, IRS faced 

unbudgeted cost increases, such as rent and pay increases, in the amount 

of about $106 million. As a result, IRS had to delay hiring revenue agents 

and officers, tax compliance officers, and tax specialists. As shown in 

appendix I, in 2002 figure 2 shows about 69 percent of IRS’s spending was 

for labor costs. IRS noted in its budget request that any major negative 

changes in the agency’s financial posture, such as unfunded salary 

increases, will have a negative effect on staffing levels. 

IRS’s Experience in 2003 

Illustrates the Difficulty of 

Projecting Savings and 

Investments

IRS’s experience with last year’s budget request illustrates the difficulty of 

projecting and realizing savings and investing resources in higher priority 

areas. As part of its 2003 budget request, IRS identified internal savings of 

almost $197 million and 2,287 FTEs to be accomplished through various 

reengineering efforts and workload decreases. IRS planned to reinvest 

those savings in higher priority areas—compliance and customer service 

program enhancements, including efforts to stabilize audit rates, improve 

telephone assistance level of service, and target highest priority collection 

cases. However, IRS now estimates that about $75 million, or 38 percent, of 

2

Treasury Inspector General for Tax Administration, Trends in Compliance Activities 

through Fiscal Year 2002, Reference No. 2003-30-078, Washington D.C.: March 2002. The 

compliance staff figures include revenue officers, revenue agents, and tax auditors.
Page 7 GAO-03-641T 

the dollar savings and about 1,280, or 56 percent, of the FTE savings will be 

achieved by the specific reengineering efforts and workload decreases as 

identified in the 2003 budget request. IRS officials provided several reasons 

why some savings for these particular reengineering efforts will not be 

realized, including delays in modernization projects and less-thananticipated workload decreases. For example, IRS received more innocent 

spouse cases than anticipated, and the cases received were more complex, 

causing the hours spent per case to increase. 

While savings associated with a particular effort listed in the 2003 budget 

request may not materialize, IRS officials said that business unit managers 

have identified other ways to increase productivity and did more work with 

fewer staff—therefore achieving productivity increases through efforts not 

identified in the 2003 budget request. As an example, officials provided an 

analysis showing increased telephone collections cases closed with 

significantly fewer staff than in the previous year. While GAO did not verify 

these savings, IRS officials were confident that this and other similar 

productivity increases were being achieved. Furthermore, IRS budget 

officials said the results of productivity increases not listed in the 2003 

budget request should be included in any tally of IRS’s savings. 

We agreed that productivity increases generate savings. IRS was unable to 

quantify the gains from productivity increases in time for this hearing. IRS 

officials also said that most of the savings generated by the productivity 

increases would be used to handle workload increases in the same area 

where savings were generated. They said the savings would not be 

available for reallocation to other areas.

As was the case in 2002, cost increases not included in the 2003 budget 

request are also limiting IRS’s ability to fund new investments. According to 

IRS officials, IRS will need to fund a total of about $388 million out of 

existing resources, including about $128 million for pay increases. 

Information Technology 

Budget Formulation 

Process Still Needs 

Improvement

IRS is requesting about $2.1 billion and 7,986 staff years in information 

technology (IT) resources for fiscal year 2004. This includes (1) $429 

million for the agency’s multiyear capital account that funds contractor 

costs for the BSM program and (2) about $1.67 billion and 7,735 staff years 

for information systems, of which $1.62 billion is for operations and 

maintenance. In preparing its fiscal year 2004 budget request for the 

operations and maintenance of information systems, IRS began to 

implement an information technology portfolio management process 
Page 8 GAO-03-641T 

patterned after the one used for the BSM program. However, until IRS fully 

implements planned process improvements, its ability to develop 

supportable information systems budget requests will remain limited.

Fiscal Year 2004 BSM Request 

Developed in Accordance with 

Federal Guidance

Consistent with the Clinger-Cohen Act of 1996,3 the Government 

Performance and Results Act of 1993,4

 OMB guidance on budget 

preparation and submission5

 require that, before requesting multiyear 

funding for capital asset acquisitions, agencies develop sufficient 

justification for these investments. This justification should reasonably 

demonstrate how proposed investments support agency missions and 

operations, and provide positive business value in terms of expected costs, 

benefits, and risks.

Since the BSM appropriation was established in fiscal year 1998, we 

recommended6

 that IRS put in place an enterprise architecture 

(modernization blueprint) to guide and constrain its business system 

investments.7

 Use of such a blueprint is a practice of leading public and 

private sector organizations. Simply stated, this architecture provides a 

high-level road map for business and technological change from which 

agencies can logically and justifiably derive their budget requests and 

capital investment plans. In response to our recommendations, IRS 

developed an enterprise architecture. In March 2002, IRS approved a new 

version of this architecture (version 2.0), which describes IRS’s current and 

target business and technology environments. In December 2002, IRS 

completed the associated high-level transition strategy that identifies and 

3

P.L. 104-106.

4

P.L. 103-62.

5

See, for example, OMB Circular No. A-11: Preparing, Submitting, and Executing the 

Budget (Washington, D.C.: June 27, 2002).

6

See U.S. General Accounting Office, Tax Administration: IRS’ Fiscal Year 1997 Spending, 

1997 Filing Season, and Fiscal Year 1998 Budget Request, GAO-T-GGD/AIMD-97-66

(Washington, D.C.: Mar. 18, 1997); Tax Systems Modernization: Blueprint is a Good Start 

But Not Yet Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54

(Washington, D.C.: Feb. 24, 1998); and Tax Administration: IRS’ 2000 Tax Filing Season 

and Fiscal Year 2001 Budget Request, GAO/T-GGD/AIMD-00-133 (Washington, D.C.: 

Mar. 28, 2000).

7

An enterprise architecture provides an institutional “blueprint” for defining how an 

organization operates today (baseline environment) in both business and technological 

terms, and how it wants to operate in the future (target environment). It also includes a 

sequencing plan that provides a road map for transitioning between these environments.
Page 9 GAO-03-641T 

conceptually justifies needed investments to guide the agency’s transition 

over many years from its current to its target architectural state.

IRS’s $429 million request for the BSM account for fiscal year 2004 is based 

on its enterprise architecture as well as its related life cycle methodology 

and investment management process. Thus, this request is based on 

analyses that meet the statutory and regulatory requirements for requesting 

multiyear capital investment funding.

BSM Program Management 

Capability Improved, but Risks 

Remain

Pursuant to statute,8 funds from the BSM account are not available for 

obligation until IRS submits to the congressional appropriations 

committees for approval an expenditure plan that meets certain 

conditions.9

 In November 2002, IRS submitted an expenditure plan seeking 

approval to obligate funds from the BSM account for its planned fiscal year 

2003 projects and program-level initiatives. In March 2003, IRS submitted a 

revised plan that reduced the initial request by shifting funding for two 

BSM projects to the information systems account and reducing the amount 

requested for the core infrastructure projects and program-level initiatives. 

In briefings to the staff of the relevant appropriations subcommittees and 

IRS on the results of our review of IRS’s November 2002 expenditure plan, 

we reported that IRS has progressed significantly in improving its 

modernization management controls and capabilities, and has taken steps 

to better balance the pace of the BSM program with its management 

capability. We also reported that, although important progress has been 

made, certain management controls and capabilities, related to 

configuration management, human capital management, and cost and 

schedule estimate validation, have not yet been fully implemented. Our 

analysis has shown that weaknesses in these controls and capabilities 

contributed to BSM project cost, schedule, and performance shortfalls 

during fiscal year 2002. In approving the release of a portion of the fiscal 

year 2003 BSM funding, the appropriations subcommittees directed IRS to, 

among other things, fully establish and implement all management 

processes and controls needed to effectively manage the BSM program. 

8

Consolidated Appropriations Resolution, 2003 (P.L.108-7).

9

IRS’s BSM expenditure plans are required to (1) meet OMB capital planning and investment 

control review requirements, (2) comply with IRS’s enterprise architecture, (3) conform 

with IRS’s enterprise life cycle methodology, (4) be approved by IRS, Treasury, and OMB, 

(5) be reviewed by GAO, and (6) comply with the acquisition rules, requirements, guidelines, 

and systems acquisition management practices of the federal government.
Page 10 GAO-03-641T 

IRS has acknowledged these weaknesses and has initiatives planned or 

under way to address them. 

Despite the progress made during the past year, IRS’s BSM program faces 

heightened risks because (1) several key projects are entering their later 

stages of development and deployment, (2) some of these projects provide 

the foundational infrastructure upon which later projects depend, (3) an 

increasing number of project milestones are experiencing cost increases 

and schedule delays, and (4) IRS plans to start more projects. While IRS is 

better prepared to manage risk and meet the challenges ahead, sustained 

top management involvement, improved management capabilities, and 

consistent oversight, are critical to the successful implementation of the 

BSM program.

Although Progress Made, 

Information Systems Budget 

Request Development Process 

Needs Additional Improvements

Leading private- and public-sector organizations have taken a project- or 

system-centric approach to managing not only new investments but also 

the 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 the OMB and GAO.10 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 budget 

requests for the operations and maintenance of information systems. These 

approaches also provide a way to hold IT managers accountable for 

10See, 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).
Page 11 GAO-03-641T 

operations and maintenance spending and the ongoing efficiency and 

efficacy of existing systems.

In our assessment of IRS’s fiscal year 2003 budget request, we reported11

that IRS did not develop its information systems operations and 

maintenance request in accordance with the investment management 

approach used by leading organizations. For example, in developing the 

request, IRS had not identified and assessed the relative costs, benefits, and 

risks of specific operations and maintenance systems and projects. Instead, 

according to IRS officials, they developed the request by beginning with the 

fiscal year 2002 expenditures and simply adding amounts to fund cost-ofliving and salary increases. IRS officials attributed this 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. We recommended12 that IRS prepare 

its fiscal year 2004 information systems budget request in accordance with 

the investment management approach used by leading organizations. IRS 

agreed and initiated actions to address our recommendation. 

IRS has made progress in incorporating investment management practices 

into the formulation of its fiscal year 2004 information systems budget 

request. For example, IRS created information technology portfolios for its 

operations and maintenance systems in accordance with revised OMB 

budget guidance.13 According to IRS officials, these portfolios were used to 

assist managers and staff involved with information technology planning 

and investment decision-making to (1) assess initiatives in terms of their 

cost, risks, and expected returns and (2) determine and maintain the 

appropriate mix of investments. They also indicated that they are working 

with Treasury and OMB to improve the information technology investment 

portfolio development process. IRS’s emphasis on portfolio development 

demonstrates an increased effort to ensure its information systems 

operations and maintenance requests are supported.

11U.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) and Internal Revenue Service: Improving Adequacy of 

Information Systems Budget Justification, GAO-02-704 (Washington, D.C.: June 28, 2002).

12See GAO-02-580T and GAO-02-704.

13Office of Management and Budget, OMB Circular No. A-11.
Page 12 GAO-03-641T 

Despite this progress, IRS has not yet completed its planned actions to 

implement our recommendation. As of April 2003, IRS has not developed 

an activity-based cost accounting system 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 officials stated that they are developing an activity-based cost model in 

conjunction with the Integrated Financial System modernization project, 

but this model will not be fully implemented until December 2003. 

Furthermore, IRS officials stated that data from this model will not be 

available for use until the fiscal year 2006 budget formulation cycle. In 

addition, IRS has still not completed its capital planning guidance, and thus 

did not use it in preparing its fiscal year 2004 information systems budget 

submission. According to IRS officials, the agency has developed a draft 

Capital Planning and Investment Control guide that is undergoing internal 

review, but it will not be completed and implemented until late October 

2003. Until IRS incorporates the cost model and capital planning and 

investment control guidance into the preparation of its information 

systems budget request, IRS will not be able to ensure that the information 

systems operations and maintenance request is adequately supported.

Interim Results of IRS’s 

2003 Filing Season 

Show Improvement 

over Previous Years 

IRS’s filing season performance through mid-March has improved 

compared to recent years, based on data we reviewed in five key filing 

season activities—paper and electronic processing, telephone assistance, 

IRS’s Web site, and walk-in assistance. For example, telephone access has 

improved, and IRS’s Web site has seen increased use. While we cannot 

quantify the connection between these results and IRS’s ongoing systems 

modernization efforts, the improvement in filing season performance, in 

part, represents a payoff from systems modernization. 

IRS’s Paper and Electronic 

Processing Operations Have 

Gone Smoothly This Year 

Through March 28, IRS has smoothly processed about 67 million individual 

income tax returns. According to IRS data and to officials and tax 

preparers we spoke with, IRS has not experienced any significant 

processing or computer problems. IRS officials attribute this year’s smooth 

processing, in part, to the relatively insignificant tax law changes compared 

to last year. 

Electronic filing continues to grow, although at a slower rate than 

projected. Of the approximate 67 million returns, about 26 million 

individual income tax returns were filed on paper and 41 million returns 
Page 13 GAO-03-641T 

were filed electronically, as of March 28, as shown in table 1. This 

represents an increase in electronic filing of 10.4 percent over the same 

time period last year. Whether IRS will achieve its goal of 54 million tax 

returns filed electronically in 2003 is uncertain. Last year at this time IRS 

was also below its goal, but made up the difference late in the filing season.
Page 14 GAO-03-641T 

Table 1: IRS Performance in the First Weeks of the 2003 and 2002 Filing Seasons

Source: IRS data.

a

From January 1 to March 29, 2002, and January 1 to March 28, 2003.

b

Based on actual counts from January 1 to March 23, 2002, and January 1 to March 22, 2003.

c

Based on a representative sample estimated at the 90 percent confidence level from January to 

February 2002 and 2003.

d

From January 1 to March, 31 2002 and 2003.

e

From January 1 to March 28, 2003.

f

From January 1 to March 16, 2002, and January 1 to March 15, 2003.

g

From January 1 to March 9, 2002, and January 1 to March 8, 2003. 

Growth in electronic filing is a key part of IRS’s modernization strategy. 

Electronic filing allows IRS to control costs and improve customer service, 

by reducing labor intensive processing of paper returns. This year, to help 

increase electronic filing, IRS entered into an agreement with the Free File 

Alliance, a consortium of 17 tax preparation companies, to offer free online 

tax preparation and filing services for at least 60 percent of all taxpayers 

via the IRS Web site. IRS data shows that as of March 26, about 2.1 million 

returns were filed through the consortium, close to the goal of 2.5 million. 

Volume in thousands

Actual returns processeda 2002 2003

 Paper 29,014 26,289

 Electronic 37,035 40,870

Telephone assistance

 Total callsb 60,674 38,213

 Answered by assistors 9,540 9,938

 Answered by automation 28,130 19,860

 Not answered 23,004 8,415

 Customer service representative level of serviceb 69% 84%

 Average speed of answerb 216 seconds 155 seconds

 Accounts customer accuracy ratec 88% +/- 1% 88% +/- 1%

 Tax law customer accuracy ratec 84% +/- 1% 81% +/- 1%

Internet assistance

 Forms and publications downloadedd 213,000 283,000

 Refund status inquiriese N/A 10,200

Walk-in assistance

 Returns prepared at IRS walk-in sitesf 436 291

 Returns prepared at volunteer sitesg 466 594
Page 15 GAO-03-641T 

While there have been some complaints about pop-up ads, taxpayers 

reported in IRS surveys that they were generally pleased with the service. 

Because of the growth in electronic filing, the number of paper returns has 

declined in recent years. As a result, IRS is closing processing operations at 

the Brookhaven Submission Processing Center, one of its eight processing 

centers for individual income tax returns filed on paper. This closing 

represents a significant consolidation of IRS’s processing operations. 

Based on processing data to date, the consolidation has not disrupted the 

filing season. 

Telephone Access Improved 

over Last Year, While 

Accuracy Generally 

Remained Stable

Access to IRS’s toll-free telephone lines improved over last year. As table 1 

shows, as of March 22, the percentage of taxpayers that attempted to reach 

an assistor and actually got through and received service—referred to as 

the Customer Service Representative level of service—increased 15 

percentage points over the same period last year, for the approximately 10 

million calls served. In addition, taxpayers have waited 61 seconds less, on 

average, to speak to an assistor so far this filing season as compared to last 

year. According to IRS officials, the increase in the level of service is largely 

due to lower than expected call demand and more effective routing of calls 

to qualified assistors. Part of the reason for the decrease in demand is that 

some taxpayers are using the new refund status check feature on IRS’s Web 

site rather than calling. 

Accuracy was relatively stable this year as compared to last year. As shown 

in table 1, taxpayers who called about their accounts received correct 

information an estimated 88 percent of the time. IRS officials said that 

accounts accuracy rates remained stable, because many simple refund 

inquiries were diverted to the new refund feature on IRS’s Web site, leaving 

assistors to handle more complex calls. Table 1 also shows taxpayers who 

called with tax law questions received correct information an estimated 81 

percent of the time, slightly down from last year. According to IRS officials, 

because many assistors had difficulty in adapting to a change in the guide 

used to query callers. 

Web Site Is Seeing Increased 

Use and Has New Features, 

although Concerns about 

Usability Still Exist 

IRS’s Web site use has increased over last year. About 283 million forms and 

publications have been downloaded—a 29 percent increase over the same 

period last year. In addition, an independent study reported that IRS’s Web 

site had ranked in the top 10 out of 40 government web sites and that users 
Page 16 GAO-03-641T 

were able to access IRS’s site in less than one second during the January 20 

through February 28 test period. 

IRS added a new feature to its Web site for use this filing season: the refund 

status check, (“Where’s My Refund?”). This feature enables taxpayers to 

find out if the IRS received their returns and whether their refunds were 

processed. IRS intended this feature to divert some simple telephone calls 

from assistors. Data shows that as of March 28, about 10.3 million 

taxpayers have used this feature to check the status of their refund. 

While some of the problems we identified in previous years appear to have 

been remedied, we continue to have concerns about the search function on 

IRS’s Web site. Our informal testing of IRS’s Web site showed that it is more 

user friendly than last year. We found it to be more accessible, easier to 

navigate, and data was more current. However, the search functions still do 

not always make the most pertinent information readily available. For 

example, when we typed “earned income tax credit” into the forms and 

publication search function, Publication 596—the primary publication on 

the earned income tax credit—was the 70th item on the list, and we had to 

scroll through seven pages to find it. According to IRS officials, an 

independent contractor is currently looking at ways to improve the search 

functions, and the contractor expects to issue its report in mid-April of this 

year.

Walk-in Assistance 

Improved and Community 

Based Coalitions Expanded 

over Last Year

 The quality of assistance at IRS’s walk-in sites has improved this year over 

last, and service to taxpayers through community based coalitions has 

increased. At congressional direction, the TIGTA has been responsible for 

measuring the quality of assistance at IRS’s walk-in sites. According to 

TIGTA officials, the accuracy of tax law assistance provided at IRS’s walkin sites increased as of February this year to about 73 percent—an increase 

of 27 percentage points over the same period last year. TIGTA also found 

that the rate at which IRS employees referred taxpayers to a publication 

instead of answering tax law questions—which had been an issue last 

year—declined by about 85 percent. 

According to TIGTA officials, the increased accuracy rates resulted from 

various steps taken by IRS, including revising to the guidelines used by 

walk-in staff, certifying staff proficiency, conducting monthly reviews of 

tax law accuracy, and taking immediate action to address review 

information relating to any incorrect answers or improper referrals found 

during IRS or TIGTA quality reviews. 
Page 17 GAO-03-641T 

As table 1 shows, more taxpayers had their returns prepared by 

community-based coalitions and other organizations that provide free tax 

return-preparation assistance as part of IRS’s Volunteer Income Tax 

Assistance and Tax Counseling for the Elderly programs. These programs 

use IRS-trained volunteers to help prepare basic tax returns for taxpayers 

with special needs—including those with a low to fixed income, nonEnglish speaking people, and the elderly. 

Concluding 

Observations 

As the examples of improved telephone access and the Brookhaven 

Processing Center closing show, IRS is beginning to realize payoffs from 

the ongoing systems modernization investments and wider management 

improvements. Although IRS has not succeeded in reallocating staff to one 

of its priority needs, compliance, there will likely be increased potential for 

such reallocation as modernization proceeds. This will present Congress, in 

its oversight and appropriations roles, with significant opportunities to 

weigh in on IRS’s overall strategy for better accomplishing its mission. 

Specifically, Congress will have opportunities to help IRS establish 

strategic priorities and make decisions about the resources needed to meet 

those priorities. 

Mr. Chairman, this concludes my prepared statement, and I would be 

pleased to respond to any questions. 
Page 18 GAO-03-641T 

Appendix I

How IRS Allocated Expenditures and Staff Apendxies

Resources in Fiscal Year 2002 ApendxiI

To provide some context for understanding the 2004 budget request, figures 

2 and 3 illustrate how the Internal Revenue Service (IRS) allocated 

expenditures and staff resources in fiscal year 2002, the most recently 

completed year. Figure 2 shows IRS’s fiscal year 2002 actual expenditures 

in several categories, including about 69 percent that was spent on labor. 

Figure 3 shows how IRS allocated its labor across functional areas, 

including ensuring compliance such as auditing and collecting delinquent 

taxes (45 percent), providing taxpayer services such as telephone 

assistance (21 percent), and processing tax returns (15 percent). However, 

the boundaries between categories may not be as well defined as the 

figures indicate. For example, in figure 3, staff categorized as maintaining 

information systems could also be considered under support for 

processing, taxpayer service or compliance. Therefore, the figures are 

meant to provide a summary of how IRS uses its resources and should be 

interpreted with caution. 
Appendix I

How IRS Allocated Expenditures and Staff 

Resources in Fiscal Year 2002

Page 19 GAO-03-641T 

Figure 2: IRS’s Expenditures in Fiscal Year 2002 1

1

IRS's annual expenditures may exceed its current year appropriations, because IRS has 

additional budgetary resources available to it and also incurs certain costs that were funded 

in prior years. During fiscal year 2002, IRS's total budgetary resources included its fiscal 

year 2002 appropriation of $9.437 billion as well as unobligated balances available from 

prior years, spending authority from offsetting collections, and recoveries of prior year 

obligations.

Labor $7.1 billion

Contracts $.94 billion

Equipment $.41 billion

Rent, communications, 

and utilities

$1.1 billion

4%

8%

9%

10%

69%

Other nonlabor costs 

$.81 billion

Source: GAO analysis of IRS data.

Total expenditures 

$10.4 billion
Appendix I

How IRS Allocated Expenditures and Staff 

Resources in Fiscal Year 2002

Page 20 GAO-03-641T 

Figure 3: How IRS Spent Its 99,180 Staff Years in Fiscal Year 2002 

15%

6%

15%

22%

14%

9%

Source: GAO analysis of IRS data.

Conducting examinations

21,771 staff years, 

including:

16,417 for field examinations

3,703 for electronic examinations

1,651 for document matching

Collecting taxes

13,861 staff years, 

including:

7,917 for field collections

5,944 for electronic collections 

Other compliance

9,164 staff years, 

including:

3,638 for criminal investigation

3,269 for appeals and litigation

2,257 for taxpayer advocate case processing 

and other actions

Assisting taxpayers via telephone, e-mail, 

and correspondence

14,898 staff years

Offering other taxpayer assistance

5,805 staff years, 

including:

2,088 for face-to-face assistance

1,299 for publication/education

2,418 for web site and other assistance

Processing tax returns

15,101 staff years 

20,703 staff years assisting 

taxpayers

44,796 staff years ensuring 

compliance with the tax law

15,101 staff years 

processing tax returns

18,580 staff years supplying 

program support

Providing management and other services

10,892 staff years 

Maintaining information systems 

7,688 staff years 

11%

8%

(440182)
United States

General Accounting Office

Washington, D.C. 20548-0001

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