Testimony

Before Congressional Committees

United States General Accounting Office

GAO

For Release on Delivery

Expected at 9:00 a.m.

Tuesday, May 8, 2001 IRS MODERNIZATION

Continued Improvement in

Management Capability

Needed to Support LongTerm Transformation

Statement of James R. White, Director

Tax Issues

Randolph C. Hite, Director

Information Technology Systems Issues

Steven J. Sebastian, Acting Director

Financial Management Issues

GAO-01-700T
Page 1 GAO-01-700T

Mr. Chairman and Members of the Committees:

We are pleased to be here today as we approach the third anniversary of

the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998,1

which established Congress’ expectation that IRS modernize to better

meet taxpayer needs. We will discuss (1) how well IRS is providing service

to taxpayers and ensuring compliance with the tax laws, and (2) IRS’

progress in its long-term effort to modernize. We will also note some

issues related to IRS’ fiscal year 2002 budget request. Our emphasis will be

on the developments over the past year since your last modernization

oversight hearing and potential oversight issues for the future.

IRS modernization is a massive and multifaceted effort that will take at

least a decade to complete. Historically, IRS has not been able to provide

American taxpayers with the quality of service that Congress has

demanded. Our past reports chronicle IRS’ deficiencies, including

inefficient, paper-driven processes; poor management; weak incentives for

employees to provide quality service; and antiquated information systems.

Because of the breadth and depth of these deficiencies, modernization

encompasses changes to virtually every aspect of IRS, from its

organizational structure and business processes to its technology and

ways of measuring and managing the performance of the agency and its

100,000 employees. Implemented together, improvements in these areas

are intended to provide improved service and compliance. At stake is IRS’

ability to perform its mission. While the transformation is occurring, IRS is

simultaneously challenged to deliver its stay-in-business activities without

interruption—-answering telephones, processing returns, issuing refund

checks, and enforcing tax laws.

Our statement, based primarily on our recent audit work, makes the

following points:

IRS posted mixed results this year in collecting revenues, providing

taxpayer service, and enforcing tax laws. On the plus side, during this

year’s filing season, IRS processed millions of tax returns and issued

refunds without significant problems, taxpayers had an easier time

getting through to telephone assistors, and IRS said it made progress in

correcting weaknesses that threatened the security of electronically

filed tax information. On the down side, the quality of service provided

 1

P.L. 105-206, July 22, 1998.
Page 2 GAO-01-700T

to taxpayers who visited taxpayer assistance centers, trends in audit

rates and enforcement programs, and productivity declines continue to

be troubling. We share concerns expressed in Congress and by tax

practitioners that the declines in audits and enforcement actions may

increase incentives for taxpayers either to not report or to underreport

their tax obligations.

With respect to modernization, IRS is making incremental progress in

overhauling its organization, performance management system,

business processes, and information technology. Successful

completion of these efforts, each a management challenge unto itself,

should give IRS a foundation to dramatically improve service and

compliance in the future. IRS made important progress this year. It

implemented its new organizational structure, continued to develop a

blueprint for modernizing its business processes and information

systems, and more fully defined its strategic direction. However,

progress has not met expectations. For instance, IRS is not where it

should be in implementing management controls over business

systems modernization, which has contributed to project delays. IRS’

efforts to develop a measure of voluntary compliance did not proceed

at the pace IRS anticipated, and absence of this measure continues to

compromise the effectiveness of the performance system as a whole.

In an effort as complex and risky as IRS’ modernization, however, it is

important to remember that, while the timetable for change is

important, cutting corners to achieve this timetable is not prudent.

A performance management system that establishes goals, objectives,

and measures—a structure for guiding and evaluating the

transformation of IRS—is essential to meeting Congress’ expectations

for IRS. In addition, a performance management system gives

employees a blueprint of how to do their jobs and incentives to

support what IRS wants to accomplish as an agency. While IRS has

made progress creating the structure of its performance management

system, managers at the working levels of the organization are not yet

routinely using data to monitor and manage performance. In some

cases, relevant, accurate data, such as financial data, are not available

or are not available on a timely basis. In other cases, analyses of past

performance are not complete enough to give managers an

understanding of how to improve performance.
Page 3 GAO-01-700T

IRS posted mixed results over the past year in processing returns,

providing service to taxpayers, and enforcing tax laws. The returnprocessing and refund-issuing aspects of the 2001 filing season appear to

be winding down smoothly, and officials said that they have corrected

some internal control weaknesses that we identified in the last filing

season that threatened the security of electronically filed tax data. IRS

made some progress in improving taxpayers’ access to telephone

customer service, but concerns remain over the levels of access and the

accuracy of information provided. Declines since 1996 in individual audit

rates, the use of key enforcement authorities, and resolutions of tax

delinquencies are troubling.

Our preliminary review of the 2001 filing season did not identify any

significant problems adversely affecting IRS’ ability to process returns and

refunds.2

 This accomplishment is a proud testament to the dedication and

abilities of IRS employees who meet this critical responsibility despite

shortcomings in information systems and the challenge of working in a

rapidly changing organization. The successes in processing returns and

issuing refunds were achieved in a period in which the number of returns

filed continues to grow, as does the level of complexity in the returns.3

Our review of IRS’ electronic filing systems during the 2000 filing season

showed that IRS had ineffective controls to ensure the security of those

systems and electronically transmitted taxpayer data. We demonstrated

that individuals, both inside and outside of IRS, could gain unauthorized

access to IRS’ electronic filing systems and view, modify, copy, or delete

taxpayer data. Although IRS said that it had not had evidence of any such

intrusions, IRS did not have adequate procedures to detect intrusions if

they had occurred. According to IRS officials, IRS moved promptly to

correct the access control weaknesses we identified before this year’s

filing season. IRS developed plans to improve security over its electronic

filing systems and internal networks and said that it had substantially

implemented those plans. We plan to test the effectiveness of IRS’ actions

later this year. Sustaining effective computer controls in today’s dynamic

 2

Internal Revenue Service: 2001 Tax Filing Season, Systems Modernization, and Security of

Electronic Filing (GAO-01-595T, Apr. 3, 2001).

3

Processing and issuing refunds is one issue; ensuring compliance is another. IRS controls

to ensure that refunds are valid are often not applied until months after refunds are

disbursed.

IRS’ Performance Was

Mixed

Returns Processed and

Refunds Issued Without

Significant Problems
Page 4 GAO-01-700T

computing environment will require top management attention and

support, disciplined processes, and continuing vigilance.

The news on telephone customer service activities is better this year than

last, although IRS still has a long way to go to reach its goal of providing

assistance comparable to that provided by leading public and private

telephone customer service organizations. One indicator of IRS’

performance in assisting the millions of taxpayers who call with questions

is “level of service”—a measure of the number of calls answered divided

by the number of calls attempted. As shown in figure 1, IRS answered a

greater percentage of calls during the first 11 weeks of this filing season

than it did at the same point in 1998, 1999 and 2000.

Figure 1: Toll-Free Telephone Level of Service for the First 11 Weeks of Filing

Seasons 1998 through 2001

Note: IRS’ level of service figures measure the percentage of call attempts that ultimately receive

assistance—either from a customer service representative or an automated response menu. The

figures do not address how long callers waited to receive assistance. The level of service

computation for 2001 is not completely comparable to the computation for the other years because

IRS is routing some refund inquiry calls this year to its Tele-Tax line for automated responses. In an

effort to provide as accurate a comparison as possible to IRS’ performance in past years, we adjusted

the level-of-service computation to include refund inquiries answered by the automated Tele-Tax line,

but Tele-Tax data does not account for taxpayers who may have abandoned their calls before getting

an answer.

Source: GAO’s analysis of IRS’ data.

Despite Progress,

Customer Service Lags

Behind Goals

74

48

63

76

0

20

40

60

80

100

1998 1999 2000 2001

Calendar year

Service level
Page 5 GAO-01-700T

Despite these improvements in level of service, IRS officials recognize that

to achieve the goal of providing telephone assistance comparable to that

provided by leading public and private call center operations, IRS needs to

do more to improve access to telephone assistance. Almost one-quarter of

taxpayers’ calls to IRS were not answered. Declines in the productivity of

telephone assistors and delays in modernizing call routing technology—

issues that we will discuss in detail in other sections of our statement—

have prevented even greater improvement.

Answering the telephone is only half of the battle. Assistors then have to

give taxpayers the right responses to their inquiries. For the 2000 filing

season, IRS estimated that it provided accurate answers to tax law

questions 73 percent of the time and to account questions 59 percent of

the time. The Commissioner recently reported that this fiscal year, IRS

provided accurate answers to tax law questions 78 percent of the time and

to account questions 88 percent of the time. However, IRS changed its

method for measuring accuracy this year, so accuracy rates cannot be

compared to prior years.

In an attempt to improve service to taxpayers who visit walk-in sites, IRS

changed the structure and increased the staffing of its field assistance

program last year, but the quality of the service provided remains a

concern. IRS reviewers posing as taxpayers conducted 272 visits to

taxpayer assistance centers before the 2000 filing season and another 272

during the filing season. Of the questions asked, 81 percent were not

answered correctly, and 21 percent of the reviewers were denied service.

A similar but smaller study done in January and February 2001 by the

Treasury Inspector General for Tax Administration found that reviewers

received inaccurate answers about 48 percent of the time.
Page 6 GAO-01-700T

Enforcement program trends continue to be troubling. IRS’ audit rate for

individuals has steadily declined since 1996, and examinations have

declined across the full spectrum of taxpayers—from individual wage

earners to businesses large and small. Figure 2 shows the declines in

individual audit rates4

 and use of three key enforcement authorities:

seizures, liens, and levies.5

 Although the Commissioner had predicted last

year that these downward trends would reverse, by and large, they did not.

Figure 2: Declines in Individual Audit Rate and Use of Enforcement Authorities, 1996 Through 2000

Source: GAO’s analysis of IRS’ data.

 4

The proportion of tax returns filed by individuals that IRS audits each year.

5

Under the Internal Revenue Code, levy is defined as the seizure of a taxpayer’s assets to

satisfy a tax delinquency. IRS differentiates between the levy of assets in the possession of

the taxpayer (referred to as a seizure) and the levy of assets such as bank accounts and

wages that are the possession of third parties such as banks and employers (referred to as

a levy). A lien is a legal claim that attaches to property to secure the payment of a debt. The

filing of a lien would prevent the taxpayer from selling an asset, with clear title, without

payment of the tax debt.

Trends in Enforcement

Programs Are Troubling

0.0

0.5

1.0

1.5

2.0

1996 1997 1998 1999 2000

Fiscal year

Percentage of 

returns audited

0

3000

6000

9000

12000

1996 1997 1998 1999 2000

Fiscal year

Seizures

0

200

400

600

800

1996 1997 1998 1999 2000

Fiscal year

Liens (thousands)

0

1

2

3

4

1996 1997 1998 1999 2000

Fiscal year

Levies (millions)

Liens

Individual audit rate Seizures

Levies
Page 7 GAO-01-700T

Also troubling is that IRS’ telephone and field collection components have

not kept pace with other IRS compliance programs such as audits that

make tax assessments when taxpayers do not fully report their tax

liabilities. Because of this, commencing in mid-1999, these collection

components began closing delinquencies without working them—that is,

without making collection contact with taxpayers through either

telephone calls or field visits. This type of case closure is referred to as

“shelving.” As shown in figure 3, tax delinquencies shelved, together with

related interest and penalties, totaled almost $12 billion at the end of

March 2001. During our fiscal year 1999 and 2000 audits of IRS’ financial

statements,6

 we found instances of unpaid tax cases in which IRS was not

actively pursuing collection despite evidence in IRS’ files that the accounts

had some collection potential. Once closed, the only provisions for

reactivating shelved delinquencies for telephone and field collection

action are (1) if the taxpayers had additional delinquencies or if

information returns were filed identifying a previously unknown levy

source and (2) if IRS found the resources to work the collection cases.

Figure 3: Tax Delinquencies Shelved by IRS

a

Includes related penalties and interest.

Source: GAO’s analysis of IRS’ collection activity reports.

 6

Financial Audit: IRS Fiscal Year 2000 Financial Statements (GAO-01-394, Mar. 1, 2001) and

Financial Audit: IRS Fiscal Year 1999 Financial Statements (GAO/AIMD-00-76, Feb. 29,

2000).

As of

9/30/99

As of

9/30/00

As of

3/31/01

As of

 9/30/99

As of

9/30/00

As of

3/31/01

Amount of delinquencies (billions)a Number of delinquencies (millions)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

2

4

6

8

10

12

Shelved Tax Delinquencies
Page 8 GAO-01-700T

Declines in the number and productivity of enforcement staff contributed

to the declines in enforcement programs and the shelving of cases. For

example, from fiscal year 1996 to 2000, the number of IRS employees

working collection cases in the field dropped from about 5,500 to about

3,600, or by about 35 percent. In part, this drop was due to attrition, and, in

part, it was due to reassignments intended to provide improved service to

taxpayers. IRS does not routinely measure the productivity of staff

handling collection cases, but IRS officials agree that it is taking longer for

staff to work cases. Our analysis of collection staff time spent on

collection cases and the number of cases closed over the period 1996 to

2000 indicates that the amount of time spent to close a case, excluding the

processing of offers in compromise, has increased by about a third.7

 While

there may be valid reasons for the productivity decline, including

additional statutory requirements and extra time spent to ensure quality,

IRS officials have not been able to provide us with a data-based

explanation of the factors that have affected productivity or the extent to

which the productivity decline has contributed to the declines in

enforcement programs.

We share concerns that have been expressed in Congress and by tax

practitioners that these declines in audits, enforcement actions, and

collections of delinquencies may increase incentives for taxpayers either

to not report or to underreport their tax obligations. Because IRS lacks a

measure of the extent to which taxpayers voluntarily comply with tax

laws, it does not know the impact of the recent declines in enforcement

activities and delinquency collections. Shelving of collection cases

exacerbates our concern regarding voluntary compliance because IRS is

not following through on cases in which taxpayers have been found to be

noncompliant. (Further details on the implications of the lack of a

voluntary compliance measure are discussed in the next section.)

IRS’ inability to reduce growing backlogs in two other programs—

innocent spouse and offer-in-compromise—negatively affect both

taxpayer service and enforcement and will merit oversight in the year

ahead. The innocent spouse program allows relief under certain

conditions to an innocent spouse from tax liabilities solely attributable to

the actions of the other spouse. The offer-in-compromise program allows

for contracts between IRS and individual or business taxpayers to settle

 7

Including offers in compromise, the average time to close a case has increased by about 50

percent.
Page 9 GAO-01-700T

tax debts for less than the amount of the debts. Sizeable inventories of

claims and offers and slow processing times under these programs are

examples of poor service to taxpayers. IRS staff reassigned to reduce

program backlogs, thus far unsuccessfully, have taken resources away

from other collection activities.

Both the innocent spouse and offer-in-compromise programs were greatly

expanded as a result of provisions of the Restructuring Act. At the end of

fiscal year 2000, the inventory of innocent spouse cases being worked had

grown to almost 40,000, but the influx of new cases appears to have

stabilized in the past 2 years. The inventory of unresolved offer-incompromise cases was about 87,500 at the end of fiscal year 2000, almost

triple the number of unresolved offers IRS had pending at the end of fiscal

year 1997. In addition, the timeliness of cases worked declined. The

percentage of offers IRS completed within 6 months was down from 64

percent in 1997 to 38 percent in fiscal year 2000.

IRS’ modernization, encompassing fundamental changes in organizational

structure, business processes, information systems, and performance

management, is a long-term effort to transform the agency into a more

reliable, accountable, customer-focused organization. Over the past year,

IRS has made important progress toward that end; however, work on

certain key aspects of business systems modernization and performance

management was slower than anticipated. In an effort as complex and

risky as IRS’ modernization, however, it is important to remember that,

while the timetable for change is important, cutting corners to achieve this

timetable is not prudent. To IRS’ credit, senior officials are making the

difficult decisions necessary to manage the modernization for the long

term. Still, managers at the working levels of the organization are not yet

routinely using a performance-based approach to their work. Such an

approach, in which managers at all levels consistently apply performance

management skills in their day-to-day work by routinely gathering and

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

improvements and achieve the transformation Congress desires.

In October 2000, IRS largely completed its transition to the new

organizational structure. In a process that the Commissioner likened to

putting together a giant jigsaw puzzle with literally thousands of pieces,

IRS put the new organization in place without significant effect—positive

or negative—on its processing of millions of returns this filing season.

That the reorganization has not yet led to significant changes in filing

Modernization Is

Progressing, but

Transformation Will

Be a Long-Term Effort

IRS Successfully Shifted to

Its New Organizational

Structure
Page 10 GAO-01-700T

season or other activities is not unexpected. The reorganization provides a

focus on taxpayer segments that IRS expects will help it better understand

taxpayers’ needs and identify changes to its systems and procedures for

meeting those needs. In the course of our work at IRS in the coming year,

we will be monitoring how IRS’ new operating divisions focus their efforts

to address specific compliance and service problems associated with their

particular taxpayer segments.

Business systems modernization (BSM)—a multi-year program to revamp

business processes and put in place the supporting technology—is vital to

achieving IRS’ new, customer-focused vision and enabling IRS to meet

performance and accountability goals. This multi-billion-dollar program

began a little over 2 years ago and as of March 2001, had received

congressional approval to obligate about $450 million.8

 BSM consists of a

number of new systems acquisition projects that are at differing stages of

acquisition and implementation, as well as various program-level

initiatives intended to establish the controls and capabilities for IRS to

effectively manage the projects.

We have long held—and communicated to IRS—the importance of

establishing sound management controls to guide its BSM projects.9

 In

general, the management controls and capabilities that IRS needs fall into

five interrelated and interdependent categories as shown in figure 3—

investment management, system life-cycle management, enterprise

architecture management, software acquisition management, and human

capital management.

 8

IRS requested and Congress established a multi-year systems modernization account and

funded it with about $578 million via IRS’ fiscal years 1998, 1999, and 2001 appropriation

acts. In addition to the $450 million provided so far, Congress is currently considering a

plan submitted by IRS to obligate the remaining $128 million to, among other things, fund

program-level initiatives through mid-November 2001 and ongoing projects through their

next life-cycle milestones.

9

Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If

Modernization Is to Succeed (GAO/AIMD-95-156, July 26, 1995).

Despite Important

Progress, IRS Has Yet to

Fully Implement the

Capabilities Needed to

Effectively Manage the

Business System

Modernization Program
Page 11 GAO-01-700T

Figure 3: Information Technology Management Control Areas

Source: GAO.

In addition, we have reported on the risks associated with IRS’ approach

of concurrently building systems while developing and implementing these

controls and capabilities.10 We have also reported that the risks associated

with building systems without the requisite management controls and

capabilities are not as severe early in projects’ life cycles when they are

being planned (project definition and preliminary design), but escalate as

projects are built (detailed design and development).11 In this latter case,

the risk of performance shortfalls and rework due to missing controls

increases, both in terms of probability and impact.

To its credit, IRS has made important progress in implementing

modernization management controls and capabilities. For example, IRS

has (1) largely defined and has begun implementing its system life-cycle

methodology that incorporates software acquisition and investment

management processes, (2) defined program roles and responsibilities of

IRS and its modernization contractors, (3) begun formally managing

 10For example, see Internal Revenue Service: Progress Continues But Serious Management

Challenges Remain (GAO-01-562T, Apr. 2, 2001).

11See Tax Systems Modernization: Results of Review of IRS’ Third Expenditure Plan

(GAO-01-227, Jan. 22, 2001).

Investment

Management

Life-Cycle

Management

Enterprise

Architecture

Management

Program

Management

Capability

Human Capital

Management

Acquisition

Management
Page 12 GAO-01-700T

modernization risks in an effort to proactively head off problems, and (4)

made progress toward completing its enterprise architecture. IRS has also

taken steps in response to our recommendations to strengthen the

management of individual BSM projects as well. In addition, IRS recently

hired experienced technical and managerial executives and augmented

existing modernization staff with experienced IRS information systems

and acquisition personnel.

We are concerned, however, because projects are proceeding past critical

milestones without certain essential management controls in place and

functioning. In particular, in our ongoing work for IRS’ appropriations

subcommittees, we found that IRS is proceeding with building systems—

including detailed design and software development work—before it has

implemented key controls. For example, IRS has yet to develop a

sufficiently defined version of its enterprise architecture to effectively

guide and constrain acquisition of modernization projects. In addition, it

has not yet implemented rigorous, disciplined configuration management

practices on key projects. IRS also has not ensured that the projects are

following mature software acquisition processes. As we have concluded in

our past reports, attempting to acquire modernized systems before having

the requisite management controls increases the risk that systems will

experience cost, schedule, and performance shortfalls, and these risks

increase as projects move from planning into design and development.

Key IRS projects are now beginning to experience these shortfalls. For

example, IRS data shows that a critical infrastructure project (called the

Security and Technology Infrastructure Release) was 1.5 months late and

$2 million over budget in completing its preliminary design phase in

January 2001. However, these project shortfalls are understated because

not all preliminary design phase commitments were completed then, and,

as of mid-April 2001, IRS was still working to finalize 6 of 19 work

products needed to complete this phase--meaning that the project is

actually almost 5 months late.

We discussed these missing controls with the Commissioner and his BSM

executives; they recognize the need to address these control weaknesses

and have initiated steps to do so. IRS plans to fully implement many of

these controls by the end of June 2001. In addition, the Commissioner

decided recently to slow ongoing projects and new projects, giving priority

to first putting in place missing management capacity and then building

systems. For example, the Customer Account Data Engine (CADE) project

is being delayed to a yet-to-be-determined time to, among other things,

ensure that its design is sufficiently defined. In addition, the start dates for
Page 13 GAO-01-700T

several new projects planned to begin in April 2001 are being delayed. IRS

also plans to stagger these project starts, rather than initiate them all at

once, with the first to begin this month.

With respect to BSM funding, IRS expects to totally exhaust

congressionally-approved BSM funds by about November 2001 and is

seeking approximately $397 million in its fiscal year 2002 budget to

continue the program. Given that it has been slow to completely

implement the full array of controls necessary for a modernization effort

of this magnitude, this is a good time to ensure that the overdue

modernization management controls are emphasized as a BSM priority.12

IRS’ Oversight Board is recommending $450 million for BSM in fiscal year

2002, a $53 million increase over IRS’ budget request. The Board stated

that the additional $53 million is needed to fully carry out fiscal year 2002

BSM initiatives. Since the Board submitted its budget request, IRS, as

mentioned above, has decided to slow ongoing and new projects in order

to avoid exceeding its current capacity to effectively manage the program.

Consequently, while we recognize that IRS needs funding to continue the

BSM program, it is unclear whether IRS needs the additional $53 million in

fiscal year 2002. Nonetheless, in the event that Congress does appropriate

the $450 million, IRS’ past appropriations acts and IRS’ fiscal year 2002

budget request 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

managed and spent in an effective manner.

Through modernization, Congress expects IRS to provide top-quality

service and, in doing so, to efficiently collect revenues for the Treasury. A

performance management system that establishes goals, objectives, and

measures—a structure for guiding and evaluating the transformation of

IRS—is essential to meeting these expectations. In addition, when this

structure successfully cascades down through the organization, a

performance management system gives employees a blueprint of how to

do their jobs and incentives to support what IRS wants to accomplish as

an agency. IRS has continued to make progress in revamping its

 12Congress limited IRS’ ability to obligate funds until certain controls were in place by

establishing a multi-year capital account—the Information Technology Investments

Account—to fund IRS’ systems modernization initiatives.

Effective Performance

Management Is an

Essential Element of IRS’

Transformation
Page 14 GAO-01-700T

performance management system and has most fully developed it at the

agencywide level. The 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 performance

management skills in their day-to-day work by routinely 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.

IRS still has a long way to go in establishing this type of performancebased management culture.

IRS made progress over the past year in defining its strategic direction.

For example, IRS

• published a strategic plan for fiscal years 2000 to 2005 that lays out IRS’

mission, strategic goals, and objectives; and

• implemented a strategic planning and budgeting process designed to

reconcile competing priorities and initiatives with the realities of

available resources.

However, IRS is still missing key measures of voluntary compliance.

Because these measures are vital to understanding the ultimate impact of

IRS’ service and compliance programs, their absence from IRS’ array of

organizational performance measures continues to compromise the

effectiveness of the performance system as a whole. In May 2000, the

Commissioner appointed a project director to oversee the development of

voluntary compliance measures, including filing, reporting, and payment

compliance. This planning was not completed as quickly as anticipated

and will probably not be finalized this fiscal year.

Clear strategic direction for IRS as a whole, while essential, is not

sufficient. For its performance management system to act as a blueprint

for employees throughout IRS, the elements of IRS’ system must cascade

down through the organization. In keeping with this principle, IRS’

performance management plan calls for each operating division to have

complementary goals, objectives, and measures and for front-line

managers to develop plans identifying the actions they need to take to

support operational objectives.

Progress in Defining IRS’

Strategic Direction

Mixed Success at the Division

and Employee Levels
Page 15 GAO-01-700T

IRS has had mixed success in the challenging task of implementing its

performance management system.13 For example:

• While most division performance goals reflected IRS’ agencywide goals

and priorities, none of the 72 supporting objectives was stated in terms

that were specific and measurable—that is, they did not include a time

period, a numeric target, or a means to measure the objective. Also,

with a few exceptions, the objectives did not include an expected result

or program impact.

• In fiscal year 2000, IRS began requiring managers to develop plans that

identify the actions they intend to take to meet their objectives. The

action items in the plans developed by front-line managers were

consistent with IRS’ mission, but 91 percent of the items we reviewed

were not specific, measurable, or outcome- or output-oriented.

Increasing the specificity of objectives and action plans could increase

managerial accountability and create stronger incentives for front-line

employees to achieve IRS’ goals.

Our work on IRS’ management of its telephone customer service

operations illustrates how goals and objectives have not cascaded down

through the organization. In a recent review of IRS telephone assistance,14

we found that IRS does not have long-term goals for the level of service to

be provided to taxpayers or annual goals aimed at achieving the long-term

goal over time. Without them, IRS lacks meaningful targets for

strategically planning and managing call center performance and

measuring improvement.

Revamping IRS’ evaluation systems for managers and front-line employees

is another important means of establishing a clear link between individual

employees’ work and IRS’ mission and goals. In February 2000, IRS

implemented a realigned performance evaluation system for executives,

managers, and supervisors. IRS had expected to implement a similarly

aligned evaluation system for front-line employees last fall. However,

negotiations with stakeholders are taking longer than expected, and IRS is

uncertain about when the new evaluation system will be in place.

 13See IRS Modernization: IRS Should Enhance Its Performance Management System

(GAO-01-234, Feb. 23, 2001).

14IRS Telephone Assistance: Opportunities to Improve Human Capital Management

(GAO-01-144, Jan. 30, 2001).
Page 16 GAO-01-700T

Performance evaluation—the collection of data on performance and the

analysis of that 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 or are not available on a timely basis to support program

evaluations. In other cases, analyses of past performance are not complete

enough to give managers an understanding of how to improve

performance.

Financial information is an example of management information that is

not available on a timely basis to IRS managers. IRS was able this year to

use data from its financial systems to produce, for the first time, financial

statements that received an unqualified opinion.15 However, it did so

through the use of substantial, costly, and time-consuming processes that

provided data months after the fact for a single point in time. As a routine

matter, IRS’ financial management systems do not produce information

that is current or accurate and that can be used to assist managers in dayto-day decisionmaking. For example, IRS does not track the cost

accounting information needed to prepare cost-based performance

information. Consequently, managers do not have the basic information

needed to prepare reliable cost-benefit data for internal decisionmaking

and for budget justifications, which could lead to inappropriate

management or budgetary decisions.

IRS’ analyses of the declines in productivity referred to earlier in this

statement are examples of incomplete program performance evaluations.

Taxpayer access to telephone assistors is less than it could be because

telephone assistor productivity has declined for the third filing season in a

row. IRS has done several studies of productivity, but only considered

time spent handling a taxpayer call. IRS did not study other segments of

assistors’ time that would affect overall productivity, including time spent

waiting to receive a call, time spent away from the telephone, and time

assistors were not assigned to answer calls. Similarly, IRS officials could

not give us an empirically-based explanation for declines in enforcement

staff productivity. With more complete evaluations of the causes of

productivity changes, IRS managers would have a more informed basis for

making decisions about how to improve productivity and be more likely to

meet performance goals.

 15An unqualified, or clean, opinion means that financial statements are fairly presented.

Managers Not Routinely Using

Data to Monitor and Manage

Performance
Page 17 GAO-01-700T

Understanding the factors that drive productivity changes at IRS is

important when evaluating IRS’ budget. While the increase in IRS’

workload and the complexity of its work might justify additional

resources, declines in productivity raise questions about whether IRS is

using existing resources efficiently. However, IRS’ evaluations of

productivity are not complete enough to use in making informed

judgments about the extent to which existing resources could be used

more efficiently. As a consequence, it was difficult to analyze IRS’ budget

request for additional staff (the STABLE initiative16). In a letter last week

to the Chairman, Subcommittee on Oversight, House Committee on Ways

and Means, we said we were generally supportive of IRS’ request on the

grounds that the initiative targeted areas of need.17 However, we also

recognized that opportunities exist to improve productivity in those areas.

As IRS moves forward with modernization, the capacity to conduct sound

performance evaluations will be one building block for success. Indeed,

the Commissioner has written about the need for research and analysis

that will help IRS decisonmakers find the best ways to improve

performance against strategic and operational measures. We recently

reported that it must address longstanding challenges to produce research

results that meet the needs of managers and decisionmakers. These

include, for example, ensuring that staff have the right mix of skills for the

work and that research focuses on managers’ needs. IRS recently

established a Research Council to coordinate research activities, including

standardized training, data needs, and quality standards.

Modernization of IRS’ organizational structure, business processes,

performance management system, and information technology is

necessary if IRS is to achieve its goals of improving service to taxpayers

and compliance with tax laws. While important progress has been made in

laying the foundation for a new IRS, parts of the modernization effort have

gone slower than expected. Clearly, this is disappointing. Unfortunately, it

reflects the continuing need to build management capability. The goal of

improving service to taxpayers quickly must be balanced with the need to

prudently manage a massive, long-term effort like IRS modernization. As

 16STABLE (Staffing Tax Administration for Balance and Equity) is designed to boost staff

levels in tax compliance and customer service programs.

17Fiscal Year 2002 Budget Request for the Internal Revenue Service (GAO-01-698R, May 1,

2001).

Conclusion
Page 18 GAO-01-700T

of today, IRS does not have all the program management capabilities it

needs to manage a very large systems acquisition program. Nor do IRS

managers routinely use results-oriented management tools such as clear

goal-setting and data-based evaluations of performance.

Mr. Chairman, that concludes our statement. We would be pleased to

respond to any questions that you or other members may have at this time.

(440030)