IRS 2014 BUDGET

Improvements Made 

to Budget Request and 

Cost Estimate, but 

Further Actions 

Needed

Report to Congressional Committees

September 2013

GAO-13-835

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-835, a report to 

congressional committees.

September 2013

IRS 2014 BUDGET

Improvements Made to Budget Request and Cost

Estimate, but Further Actions Needed

Why GAO Did This Study

The financing of the federal 

government depends largely on IRS’s

ability to administer the tax laws, which 

includes providing service to taxpayers 

and enforcing the law to ensure 

everyone pays the taxes they owe. For 

fiscal year 2014, the President

requested $12.9 billion for IRS, an 

increase of 9 percent over fiscal year 

2012 actual levels. 

Because of the size of IRS’s budget 

and the importance of its programs, 

GAO was asked to review the fiscal 

year 2014 budget request. In April and 

May 2013, GAO reported preliminary 

observations on IRS’s budget. Among 

other things, this report assesses how 

IRS prioritizes new initiatives; steps 

IRS has taken to improve the PPACA 

cost estimate and the reporting 

transparency of the related IT 

investment; and the type of information 

available in the budget justification 

about major IT systems. To address 

these objectives, GAO reviewed the 

fiscal year 2014 budget justification, 

compared the updated PPACA cost 

estimate to GAO’s Cost Estimating and 

Assessment Guide, and interviewed

IRS Corporate Budget officials.

What GAO Recommends

GAO recommends that IRS improve 

budget formulation guidance for new 

initiatives; improve the accuracy and 

credibility of future updates to the 

PPACA cost estimate as well as report 

the related IT investment publicly; and 

consolidate major IT investment 

reporting. IRS agreed with three of 

GAO’s four recommendations and 

agreed with the majority of the actions 

associated with improving the accuracy 

and credibility of the PPACA cost 

estimate.

What GAO Found

For the fiscal year 2014 budget formulation process, the Internal Revenue

Service (IRS) implemented a new process that uses templates to help screen, 

prioritize, and select new initiatives before detailed business cases are 

developed to support funding requests. The template information that GAO 

reviewed varied in detail and scope; for some, IRS guidance may have 

contributed to incomplete submissions to senior leadership. According to Office 

of Management and Budget Circular A-94, in order to evaluate and compare 

funding initiatives, decision-makers need to be aware of benefits, costs, and 

strategies related to achieving program goals. By improving guidance on the type 

of data to include, IRS could help ensure the templates are fully completed. 

IRS significantly improved its Patient Protection and Affordable Care Act 

(PPACA) cost estimate. In particular, the December 2012 estimate is more 

comprehensive, reflecting the full life-cycle cost of the program—estimated at 

$1.89 billion for fiscal year 2010 through 2026. A few areas of improvement 

remain, primarily regarding the accuracy and credibility of the cost estimate. For 

example, IRS showed how the December 2012 estimate differed from the 

previous estimate, but did not explain the factors that resulted in the variances. In 

addition, IRS did not obtain a second cost estimate that could be used to assess 

the reasonableness of the $1.89 billion estimated program costs.

Overall Assessment of PPACA Cost Estimate Alignment with Best Practices

Best practice October 2010 cost estimate

Updated December 2012 

cost estimate

Comprehensive ◑ ◕

Well documented ◑ ◕

Accurate ◑ ◑

Credible ◔ ◑

Source: GAO analysis of IRS documentation.

Although the information technology (IT) systems for PPACA met dollar 

thresholds (as outlined in the Department of Treasury’s guidance) as a major 

investment for public reporting, IRS did not report this as such. Officials told GAO

they did not have time to prepare the information for the fiscal year 2014 budget 

justification, but plan to do so for fiscal year 2015. Until IRS publicly reports the IT 

systems for PPACA as a major investment, transparency about these systems’ 

implementation and administration is limited.

Although IRS included new and useful information on its major IT investments in 

the budget justification (such as life-cycle costs) other important information 

(such as the start date and percent of life-cycle costs obligated) is reported 

elsewhere or must be calculated. IRS officials said they could consolidate this 

information for ease of review. Consolidating key budget and performance data 

would ensure Congress has comprehensive, easily accessible information on 

major IT investments to guide decisions.

View GAO-13-835. For more information, 

contact James R. McTigue, (202) 512-9110, or 

mctiguej@gao.gov
Page i GAO-13-835 IRS 2014 Budget

Letter 1

Background 4

IRS Can Report Some Program-Level Obligations and FTE Data 8

New Budget Formulation Process Identifies Priorities and Reduces 

Some Work, but Guidance is Insufficient 15

IRS Identified Potential Savings in Its Base Budget 17

IRS Developed New Revenue Protection and Revenue 

Enhancement ROI Projections 19

IRS Significantly Improved Its PPACA Cost Estimate, but Did Not 

Publicly Report Investment Information for the Fiscal Year 2014 

Budget Request 23

IRS Expanded Information Reported on Its Major IT Investments in 

the Fiscal Year 2014 Budget Justification, but Additional 

Information Would Be Useful 27

IRS Implemented Six of Our Nine Prior Recommendations to 

Improve the Budget Presentation and Aid Decision Making 30

Conclusions 33

Recommendations for Executive Action 33

Agency Comments and Our Evaluation 34

Appendix I Objectives, Scope, and Methodology 37

Appendix II Non-Interactive Version of Figure 1: IRS’s Budget Formulation 

Structure 41

Appendix III Figure 8: Pre-selection Budget Formulation Process

—Sample Template 44

Appendix IV Reliability of Patient Protection and Affordable Care Act 

Cost Estimate 45

Appendix V Summary of IRS’s Major Information Technology (IT) 

Investments 55

Contents
Page ii GAO-13-835 IRS 2014 Budget

Appendix VI Comments from the Internal Revenue Service 59

Appendix VII GAO Contact and Staff Acknowledgments 61

Tables

Table 1: Availability of IRS Fiscal Year 2012 Obligations Data for 

Selected Program Activities, Organizational Entities, and 

Other Efforts of Interest 10

Table 2: Fiscal Year 2014 Projected Base Budget Savings (in 

Millions) 17

Table 3: Overall Assessment of PPACA Cost Estimate Alignment 

with Best Practices 24

Table 4: Summary of IT Investment Data Presented in the Fiscal 

Year 2014 Congressional Budget Justification for IRS and 

Exhibit 300 28

Table 5: Prior GAO Recommendations Implemented by IRS 31

Table 6: Budget-Related Recommendations to IRS That Remain 

Open 32

Table 7: Non-Interactive Version of Figures 9 through 12: PPACA 

Cost Estimate Alignment with Best Practices Outlined in 

the GAO Cost Guide 50

Figures

Figure 1: IRS Budget Formulation Structure 5

Figure 2: Alignment of Budget Execution Fund Centers to IRS’s 

Organizational Structure 7

Figure 3: Location of Appeals Fund Center Obligations in IRS’s 

Budget Formulation Structure 12

Figure 4: Location of Wage and Investment Fund Center 

Obligations in IRS’s Budget Formulation Structure 14

Figure 5: Overview of IRS’s Pre-selection Budget Formulation 

Process for Fiscal Year 2014 16

Figure 6: Projected ROI for Improve Identification and Prevention 

of Refund Fraud and Identity Theft Initiative 20

Figure 7: Projected ROI for Leverage Data to Improve Case 

Selection Initiative 22
Page iii GAO-13-835 IRS 2014 Budget

Figure 9: PPACA Cost Estimate Alignment with Best Practices for 

Comprehensiveness 46

Figure 10: PPACA Cost Estimate Alignment with Best Practices for 

Being Well Documented 47

Figure 11: PPACA Cost Estimate Alignment with Best Practices for 

Accuracy 48

Figure 12: PPACA Cost Estimate Alignment with Best Practices for 

Credibility 49

Abbreviations

ACA IT Affordable Care Act information technology 

BSM Business Systems Modernization

DME development, modernization and enhancement

FTE full-time equivalent

GPRA Government Performance and Results Act 

HHS Department of Health and Human Services

IRDM Information Reporting and Document Matching 

IRS Internal Revenue Service

IT information technology

MeF Modernized e-File

OMB Office of Management and Budget

PPACA Patient Protection and Affordable Care Act

ROI return on investment

Treasury Department of Treasury

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Page 1 GAO-13-835 IRS 2014 Budget

441 G St. N.W.

Washington, DC 20548

September 26, 2013

The Honorable Tom Udall

Chairman

The Honorable Mike Johanns

Ranking Member

Subcommittee on Financial Services and General Government

Committee on Appropriations

United States Senate

The Honorable Charles W. Boustany, Jr.

Chairman

The Honorable John Lewis

Ranking Member

Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

The financing of the federal government depends largely upon the 

Internal Revenue Service’s (IRS) ability to collect taxes, including 

providing taxpayers services to make voluntary compliance easier and 

enforcing tax laws to ensure everyone meets their obligation to pay taxes. 

For fiscal year 2014, the President requested a $12.9 billion budget for 

the IRS. This is an increase of 9 percent ($1,044 million) in discretionary 

funding over the fiscal year 2012 appropriation, and an increase of 8 

percent (6,732 full-time equivalents) in staffing over the fiscal year 2012 

actual levels.1

 1

Fiscal year 2013 funding levels reported in IRS’s fiscal year 2014 congressional 

justification did not include reductions due to sequestration and a rescission. In April 2013, 

IRS released its fiscal year 2013 operating plan, which showed how reductions were 

implemented due to sequestration and rescission. The final funding level for IRS in fiscal 

year 2013 is $11.2 billion.

In April and May of 2013, we reported preliminary 

observations on the fiscal year 2014 budget request for IRS; we also 

reported budget and staffing trends from fiscal year 2010 through 2014, 

work we conducted related to proposals highlighted in the President’s 

budget request, and reductions to the fiscal year 2013 budget for IRS that 
Page 2 GAO-13-835 IRS 2014 Budget

were due to the continuing resolution and sequestration.2 Specific 

amounts requested for fiscal year 2014 for IRS’s four appropriation 

accounts are $5.7 billion for enforcement, $4.5 billion for operations 

support, $2.4 billion for taxpayer services, and $301 million for Business 

Systems Modernization (BSM).3

Because of the size of IRS’s budget and the importance of its service and 

compliance programs for all taxpayers, you asked us to review the fiscal 

year 2014 budget request for IRS. In this report we (1) describe IRS’s 

capacity to report fiscal year 2012 obligations and FTEs by program 

activity, organizational entity, and other efforts of interest; (2) assess 

IRS’s process and the type of information used to prioritize and select 

new program initiatives; (3) describe proposed base budget savings; (4) 

describe IRS’s new projected return on investment (ROI) methodologies; 

(5) evaluate steps IRS took to improve the cost estimate for the Patient 

Protection and Affordable Care Act (PPACA)4 in accordance with GAO’s 

Cost Estimating and Assessment Guide (GAO Cost Guide)5

To conduct this work for all objectives, we reviewed key documents, such 

as the fiscal year 2014 congressional budget justification for IRS and 

IRS’s Financial Management Handbook. For the first objective, we 

analyzed inputs and outputs to the budget formulation process, and 

and 

determine the extent to which IRS is transparently reporting on the 

Affordable Care Act (ACA) information technology (IT) investment; (6) 

summarize IRS’s major IT investments and assess the type of information 

available in the congressional justification; and (7) describe IRS’s 

progress in implementing our prior budget-related recommendations.

 2

GAO, Internal Revenue Service: Preliminary Observations on the Fiscal Year 2014 

Budget Request, GAO-13-599R, (Washington, D.C.: May 3, 2013). Internal Revenue 

Service: 2013 Tax Filing Season Performance to Date and Budget Data, GAO-13-541R, 

(Washington, D.C.: April 15, 2013). 

3

The BSM appropriation provides resources for the planning and capital asset acquisition 

of IT to modernize the IRS business systems, such as Customer Account Data Engine 2 

(CADE 2) and Modernized e-File. 

4

Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and 

Education Reconciliation Act (HCERA), Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 

2010). All references to PPACA include amendments by HCERA.

5

GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs (Supersedes GAO-07-1134SP), GAO-09-3SP

(Washington, D.C.: Mar. 2, 2009).
Page 3 GAO-13-835 IRS 2014 Budget

determined IRS’s ability to report information for eight program activities, 

organizational entities, and efforts of interest. For the second objective, 

we reviewed guidance related to IRS’s pre-selection budget formation

process, and reviewed submissions for completeness against criteria 

outlined in the Office of Management and Budget (OMB) Circular A-94.6

We conducted this performance audit from October 2012 to September 

2013 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings

and conclusions based on our audit objectives. For further details on our 

scope and methodology, see appendix I.

For the third objective, we reviewed supporting documents obtained from 

IRS on its proposed fiscal year 2014 budget savings. For the fourth 

objective, we reviewed relevant studies on methods to calculate ROI. For 

the fifth objective, we analyzed the updated PPACA cost estimate and 

compared it to the characteristics of a high-quality cost estimate, as 

identified in the GAO Cost Guide. For the sixth objective, we reviewed 

Exhibit 300 “capital asset summaries,” prepared by IRS for major IT 

investments, as well as IRS and OMB guidance on preparing those 

documents, such as the Office of Management and Budget Guidance on 

Exhibits 53 and 300—Information Technology and E-Government. For the 

seventh objective, we obtained information on prior year budget 

recommendations from various IRS officials and reviewed relevant 

documentation to determine if they were implemented. In addition, we 

interviewed IRS officials, including those from the Corporate Budget 

Office, selected business units, the Office of Compliance Analytics, and 

the Affordable Care Act program office. We spoke with IRS officials and 

reviewed data collection procedures and determined that the data used in 

this report were sufficiently reliable for our purposes.

 6

Office of Management and Budget, Guidelines and Discount Rates for Benefit-Cost 

Analysis of Federal Programs, OMB Circular No. A-94 (revised October 1992).
Page 4 GAO-13-835 IRS 2014 Budget

IRS formulates its budget at three levels: appropriation account, budget 

activity, and program activity, as shown in figure 1. (See appendix II for 

the non-interactive figure of IRS’s budget formulation structure.) The 

annual budget request for IRS presents funding and FTE data at the 

appropriation and budget activity levels. IRS formulates its budget to align 

with its strategic goals, which is an intended outcome of the Government 

Performance and Results Act of 1993 (GPRA).7

 7

Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). GPRA was updated by the GPRA 

Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 3866 (Jan. 4, 2011). IRS’s 

strategic goals are to (1) improve service to make voluntary compliance easier, and (2) 

enforce the law to ensure everyone meets their obligation to pay taxes.

Background

IRS Budget Formulation 

and Execution Structures
Page 5 GAO-13-835 IRS 2014 Budget

Interactive graphic Figure 1: IRS Budget Formulation Structure

Directions:

Print instructions To print full text version of this graphic, go to appendix II.

For listings of specific program activities, mouseover the number of program activities in

the circles below.

Source: GAO analysis of IRS documents.

Pre-filing 

taxpayer

assistance 

and

education

Filing 

and 

account 

services

Investigations Exam and

collections Regulatory Infrastructure

Shared

services and

support

Information 

services

Information 

technology 

investments

Business Systems

Modernization (BSM) Taxpayer services Enforcement Operations support

Appropriations account

Budget activities

Number of program activities

Note: The number of program activities varies from one fiscal year to the next as IRS 

adjusts its budget formulation structure to address emerging priorities. Program activities 

are described in detail in the fiscal year 2014 congressional budget justification for IRS.
Page 6 GAO-13-835 IRS 2014 Budget

IRS executes its budget by allocating funds from its appropriation 

accounts to fund centers. Fund centers manage and distribute funds and 

allocate funds to sub-units, known as cost centers, where funds are 

obligated.

IRS’s appropriation accounts align with its organizational structure at the 

highest level. For example, IRS has an Operations Support appropriation 

account and an Operations Support commissioner-level organization. In 

addition, IRS’s organizational structure tracks roughly to its budget 

execution structure, which is made up of three types of fund centers: (1) 

support, (2) functional, and (3) operating. (See figure 2.)
Page 7 GAO-13-835 IRS 2014 Budget

Figure 2: Alignment of Budget Execution Fund Centers to IRS’s Organizational 

Structure

Note: This graphic shows common elements between IRS’s organizational structure and budget 

execution structure. This illustration does not include three fund centers that are not part of IRS’s 

organizational structure—Stewardship, Wage and Investment Stewardship, and Executive 

Leadership and Direction. In addition, the illustration does not include several units/functions 

identified in IRS’s organizational structure that are not fund centers.

The lower levels of the budget formulation and budget execution 

structures include (1) program activities, which break down the budget 

activities and are listed above; and (2) organizational entities and other 

efforts of interest, which are not discrete categories and are different 

perspectives of IRS’s organizational structure. For example, Wage and 
Page 8 GAO-13-835 IRS 2014 Budget

Investment is one division within IRS and can be referred to as an 

organizational entity, while identity theft would be considered an area of 

interest that crosses divisions within IRS, including Wage and Investment.

Prior to the preparation of the annual budget request, IRS budget staff 

ensure that FTE movements between budgetary accounts made during 

the fiscal year (e.g., shifting staff to work on different issues) match up 

with base budget resources assigned to each account. This review (which 

is conducted by the IRS Corporate Budget Office in coordination with 

business units) is necessary because business units may have added or 

eliminated staff during the course of the fiscal year, which can result in a 

misalignment of funding and FTEs during budget formulation. Further, the 

review ensures that FTEs—which represent the majority of IRS’s 

budgetary resources—are fully funded by appropriation accounts and that 

salary and benefits are aligned with current FTE levels.

In its annual budget request, IRS provides funding information at the 

appropriation account and budget activity levels, but not at the more 

detailed program activity level. IRS officials stated that they could provide 

more information at the program activity level; however, reporting on 

requested funding amounts for program activities could limit IRS’s 

flexibility to reprogram funds given statutory restrictions.8

 8

IRS is restricted from reprogramming funds within its appropriation accounts without 

committee approval if, among other reasons, the reprogramming will augment existing 

programs, projects, or activities in excess of $5 million or 10 percent, whichever is less. 

See, for example, the Financial Services and General Government Appropriations Act, 

2012, Pub. L. No. 112-74, div. C, title VI, § 608, 125 Stat. 786, 924 (Dec. 23, 2011).

Still, as we 

reported in May 2010, IRS could provide additional information that 

highlights new program activities or those that are proposed for either 

Alignment of Budget 

Execution and 

Formulation Processes

IRS Can Report

Some Program-Level 

Obligations and

FTE Data

Obligations and FTE

Data Are Available for 

Some Program Activities, 

Organizational Entities, 

and Efforts of Interest

with Limitations
Page 9 GAO-13-835 IRS 2014 Budget

expansion or reduction.9

As an alternative to more detailed information on requested funds, IRS 

Corporate Budget officials told us they could provide prior year obligations 

and FTE data in greater detail than reported in the annual budget request, 

including information for some program activities, organizational entities, 

and other efforts of interest. For eight areas we selected as examples,

This more detailed information could increase 

transparency and demonstrate the agency’s priorities to congressional 

decision makers.

10

IRS officials confirmed that they could provide fiscal year 2012 obligations 

data for six and partial information for one.11 They could not provide 

information for one, as shown in table 1.

 9

GAO, Internal Revenue Service: Assessment of Budget Justification for Fiscal Year 2011 

Identified Opportunities to Enhance Transparency, GAO-10-687R (Washington, D.C.: May 

26, 2010).

10We selected the eight areas based on several criteria, such as whether it was included 

in the proposed fiscal year 2014 budget initiatives or the topic of prior GAO work. See 

appendix I for a full description of our scope and methodology.

11We only requested fiscal year 2012 obligations data for the Appeals and Wage and 

Investment fund centers to obtain both a simple and complex example of the information 

available.
Page 10 GAO-13-835 IRS 2014 Budget

Table 1: Availability of IRS Fiscal Year 2012 Obligations Data for Selected Program Activities, Organizational Entities, and 

Other Efforts of Interest 

Area description

Availability of fiscal year 2012 

obligations data

Appealsa

Provides an independent, second review of IRS examination decisions.

Available

Identity theft

Identifies and prevents the issuance of fraudulent tax returns caused by identity theft.

Partially available

International exam and collections

Addresses international tax and financial crimes, including international tax evasion. 

Available

Merchant card and basis matching, and the related Information Reporting and 

Document Matching (IRDM) IT system

Establishes a new business tax return and information returns pertaining to merchant card 

payments and cost basis of securities and automatically matches information with the 

goals of increasing voluntary compliance and accurate reporting of income.

Available

Offshore voluntary disclosure program

Encourages taxpayers with hidden offshore assets and income to voluntarily come back 

into the tax system. 

Not available

Online services

Develops new web-based taxpayer services tools.

Available

Telephone & correspondence services

Allows taxpayers and paid preparers to communicate with IRS customer service 

representatives via phone and paper correspondence.

Available

Wage & Investmenta

Serves taxpayers whose primary income is derived from wages and investments.

Available

Key: Available = IRS can provide the data; Partially available = IRS can provide some of the data; Not 

available = IRS cannot provide the data.

Source: IRS Financial Management Code Handbook and discussions with IRS Corporate Budget officials.

Notes: aTo obtain both a simple and complex example of the information available and we only 

requested fiscal year 2012 obligations data for the Appeals and Wage and Investment fund centers.

According to IRS officials, obligations data for identity theft are only 

partially available because IRS tracks obligations attributed to identity 

theft from its Wage and Investment fund center, which handles most of its 

identity theft workload. However, IRS does not track identity theft-related 

obligations incurred by other IRS business units. According to a senior 

official, IRS plans to establish a Servicewide internal order code for 

identity theft at the beginning of fiscal year 2014 because it has become a 

long-term priority. Officials said they were not able to provide fiscal year 

2012 obligations data for the offshore voluntary disclosure program 

because they had not established a mechanism to track it (in part 

because the program was operated as a short-term effort in the past and, 
Page 11 GAO-13-835 IRS 2014 Budget

according to officials, has only recently been made permanent.) IRS has 

not decided if it will track obligations for the offshore voluntary disclosure 

program in the future.12

According to IRS officials, IRS obligations data for program activities, 

organizational entities, and other efforts of interest have some limitations. 

For example, the data do not include indirect costs, including costs 

associated with IRS-wide functions like human capital management and 

procurement. In addition, obligations associated with IT are tracked 

separately from non-IT costs in IRS’s financial management system. For 

example, non-IT costs for merchant card and basis matching are tracked 

separately from the related Information Reporting and Document 

Matching (IRDM) IT system. Furthermore, organizational entities and 

other efforts of interest are not discrete. Obligations can be analyzed in 

different ways, such as from an organizational perspective or a program 

perspective. Different analyses should not necessarily be summed 

together because they may use different perspectives and, when 

considered together, might result in overlaps or gaps. For example, 

organizational entities and other efforts of interest have different 

perspectives where obligations may be counted towards either. For 

instance, obligations for the Wage and Investment fund center—an 

organizational entity—may overlap with related efforts of interest, such as 

identity theft. Users of IRS obligations data should be cognizant of these 

limitations.

IRS’s obligations data show how the elements of IRS’s budget 

formulation and budget execution structures described in figures 1 and 2 

interact, and how those relationships vary in complexity. The data 

demonstrate the funding streams for IRS’s obligations: they show which 

appropriation accounts, budget activities, and program activities in IRS’s 

budget formulation structure received appropriated funds, as well as 

which fund centers within IRS’s budget execution structure managed and 

distributed the funds. Some fund centers in IRS’s budget execution 

 12In March 2013, we reported that since 2003, IRS had carried out four offshore voluntary 

disclosure programs that offered incentives for taxpayers to disclose their offshore 

accounts and pay delinquent taxes, interest, and penalties. The first three programs 

occurred in 2003, 2009, and 2011. The fourth program started in 2012 and did not have 

an end date as of September 2013. See GAO, Offshore Tax Evasion: IRS Has Collected 

Billions of Dollars, but May be Missing Continued Evasion, GAO-13-318 (Washington, 

D.C.: Mar. 27, 2013).

Funding Streams for 

Obligations Data Vary

in Complexity
Page 12 GAO-13-835 IRS 2014 Budget

structure receive appropriations from a relatively small number of 

appropriations accounts, budget activities, and program activities in IRS’s 

budget formulation structure. For example, as shown in figure 3, IRS 

obligated about $240 million from the Appeals fund center in fiscal year 

2012. While most Appeals fund center resources come from the Appeals 

program activity, it also receives funding from other parts of IRS’s budget 

formulation structure, including funds from the International exams 

program activity.

Figure 3: Location of Appeals Fund Center Obligations in IRS’s Budget Formulation 

Structure

Note: Numbers may not add due to rounding.

a

Negligible refers to obligations of less than $1,000.
Page 13 GAO-13-835 IRS 2014 Budget

Obligations data for organizational entities and other efforts of interest 

can also have a more complex relationship to IRS’s budget formulation 

structure than the Appeals example shown above. For example, in fiscal 

year 2012 the Wage and Investment fund center received funding from 3 

of IRS’s 4 appropriations accounts, 5 of its 9 budget activities, and 23 of 

its 83 program activities (see figure 4). In addition, the ease with which 

IRS can compile obligations data varies: it can be more difficult for IRS to 

compile obligations data for programs with a more complex relationship to 

its budget formulation and budget execution structures.
Page 14 GAO-13-835 IRS 2014 Budget

Figure 4: Location of Wage and Investment Fund Center Obligations in IRS’s Budget Formulation Structure
Page 15 GAO-13-835 IRS 2014 Budget

For fiscal year 2014, IRS implemented a new, pre-selection budget 

formulation process to provide senior leadership with the opportunity to 

screen, prioritize, and select funding proposals before business units 

prepare detailed business cases.13

The new pre-selection process requires business unit staff to prepare 

selective, consistent information utilizing templates. (See appendix III for 

a sample template.) Templates include high level summary information on 

the purpose of the initiative, the amount of additional funds and FTEs 

requested, and the estimated impact of the initiative. Management 

reviews the templates and identifies a preliminary list of approved 

initiatives. Next, approved initiatives are communicated to business units 

via a decision document, along with any suggested changes in scope, 

such as combining initiatives or changing requested FTE or dollar levels. 

After preliminary approval, business unit staffs prepare detailed business 

cases for approved initiatives.

However, we found that in some 

instances the information was incomplete. Previously, business unit staff 

and subject matter specialists developed detailed business cases for 

each proposed initiative. Business cases include detailed narrative 

descriptions, multi-year cost estimates, and account breakouts. IRS 

budget officials told us the new process reduces work substantially for 

business units, since staff no longer need to develop extensive 

information for each proposal; instead, they only develop full information 

for proposals approved by senior leadership.

14

 13The new pre-selection process does not include proposed IT-related program initiatives. 

New IT funding requests have been using a similar pre-selection budget formulation 

process for several years.

Figure 5 shows an overview of the new 

process.

14Business cases may ultimately be included in the budget request.

New Budget 

Formulation Process 

Identifies Priorities 

and Reduces Some 

Work, but Guidance 

is Insufficient
Page 16 GAO-13-835 IRS 2014 Budget

Figure 5: Overview of IRS’s Pre-selection Budget Formulation Process for Fiscal Year 2014

Based on our review of the templates from the taxpayer services and 

enforcement organizations, we found that the information included by 

business units on their templates varied in terms of detail and scope. This 

variation could limit the ability of senior leaders to thoroughly evaluate 

proposals. For example, about half of the templates reviewed did not 

describe the proposed initiative’s expected benefits, and while almost all 

templates included a brief description of the proposed initiative, some 

entries did not include information on the purpose of the initiative or the 

strategies that would be used to achieve program goals. According to 

OMB Circular A-94, in order to evaluate and compare funding initiatives, 

decision-makers need to be aware of benefits and costs (tangible and 

intangible), as well as strategies needed to achieve program goals.15

According to IRS budget officials, there were several reasons for 

variations among template submissions. In some instances, senior 

leadership was very familiar with proposed initiatives and familiar with the 

estimated impact; in other instances, business units were less adept at 

articulating benefits of the proposed initiative. Officials also said that 

senior leadership conducts oral discussions with the business units to 

clarify an initiative’s benefits.

 15OMB Circular No. A-94.
Page 17 GAO-13-835 IRS 2014 Budget

Template instructions provided to business units may have contributed to 

some incomplete pre-selection template submissions. For instance, the 

guidance template does not provide an example of qualitative benefits 

(appropriate for some initiatives) or proposal strategies (especially 

relevant for initiatives that have not previously been proposed). IRS 

budget officials acknowledged that improvements could be made in the 

pre-selection process guidance, especially since this was the first year for 

this new process. Providing more robust guidance to business units on 

the information to include in pre-selection templates could help to ensure 

that business units more fully complete these templates.

The fiscal year 2014 budget request for IRS shows proposed savings and 

efficiencies in its base budget in several areas totaling over $217 million 

as shown in table 2.16

Table 2: Fiscal Year 2014 Projected Base Budget Savings (in Millions)

Some of IRS’s expected fiscal year 2014 savings 

are anticipated to be achieved through operational changes, such as 

shifting funds to automate processes and streamlining or consolidating 

operations and functions to make them more cost-effective.

Taxpayer 

Services Enforcement

Operations 

Support BSM Total

Realizing Personnel Savings $13.2 $56.6 $7.9 - $77.8

Reducing IT Infrastructure - - $57.5 - $57.5

Capturing Savings from Space Optimizationa - - $39.2 - $39.2 

Funding Business Systems Modernization (BSM) - - - $30.0 $30.0

Implementing Human Capital Administrative Efficiencies - - $7.9 - $7.9

Achieving e-File Savings $5.0 - $0.1 - $5.0

Total savings $18.2 $56.6 $112.6 $30.0 $217.4

Source: Fiscal Year 2014 congressional budget justification for IRS.

Notes: Numbers may not add due to rounding.

a

Savings are shown as net.

 16The base budget is the estimated funding necessary to maintain the current level of 

services without increases for new program initiatives.

IRS Identified 

Potential Savings

in Its Base Budget
Page 18 GAO-13-835 IRS 2014 Budget

IRS’s 2014 fiscal year budget includes the following savings and 

efficiencies:

• Realizing Personnel Savings: Personnel savings are mainly the 

result of staff attrition and hiring restrictions.

• Reducing IT Infrastructure: Examples of IT infrastructure changes 

include providing improved data storage capacity, updating computer 

servers to be more efficient, adopting common technology platforms 

and a more efficient telecommunications infrastructure, and changing 

IT contracting practices. For example, IRS is in the process of 

implementing virtual computer servers for data storage. Also, the IRS 

is implementing new technologies for sharing computer services 

across the agency.

• Capturing Savings from Space Optimization: IRS has reduced (or 

plans to reduce) its office inventory, having selected 123 of its 648 

offices to be closed, consolidated, or reduced.17

• Funding BSM: BSM savings represent differences in projected costs 

of IT operations from one year to the next, including implementation 

costs related to the Current Customer Account Data Engine 2; 

Modernized e-File; Core Infrastructure; and Architecture, Integration, 

and Management.

These rental savings 

are the result of attrition, hiring restrictions, and changes in working 

environments (such as increased telework and development of 

workspace standards that decrease individual office size). Space 

optimization savings require a one-time investment of $37.5 million to 

build out new and consolidated space and relocate employees, 

resulting in expected future rent savings of $76.7 million annually 

($39.2 million net).

• Implementing Human Capital Efficiencies: Administrative efficiency 

efforts include the consolidation of employment activities and 

modifications to training programs. For example, IRS reduced the 

number of Employment Hiring Centers from 9 to 3. IRS also 

streamlined processing of requests for personnel-related changes, 

such as salary increases, transfers, or leaves of absence. In addition, 

the Employment Operations Unit automated its hiring process to 

 17Other than personnel costs, rent and related infrastructure costs represent one of the 

largest line items in the IRS budget. Although this initiative began during fiscal year 2011, 

the IRS did not know the magnitude of these savings until the fiscal year 2014 budget 

formulation process. Plans for closures, consolidations, and space reductions fall into 

three categories: small posts-of-duty offices (25 or fewer employees), mid-size and large 

posts-of-duty (generally more than 40,000 square feet), and space reduction projects.
Page 19 GAO-13-835 IRS 2014 Budget

enable electronic completion of pre-hire forms. Some training 

programs are being modified from classroom training to webinars, 

reducing travel costs and allowing more employees to attend.

• Achieving e-File Savings: These savings result from labor 

reductions related to increased use of electronic filing of tax returns 

and corresponding decrease in paper returns.

In its fiscal year 2014 congressional justification, IRS included projected 

ROI for 10 enforcement initiatives, including two initiatives that used new 

approaches in estimating potential ROI: revenue protection and revenue 

enhancement. According to agency budget officials, IRS developed the 

new ROI methodologies because it did not have enough historical data on 

these initiatives to use the same methodology used for other initiatives. 

Since fiscal year 2008, IRS has included ROI projections for new 

revenue-generating enforcement initiatives in its congressional 

justification.18

For example, the fiscal year 2014 budget for IRS requests $101.1 million 

for an “Improve the Identification and Prevention of Refund Fraud and 

Identity Theft” initiative. According to IRS, if funded, the initiative would 

protect revenue because these activities would identify fraudulent returns 

related to identity theft and resolve cases prior to issuing a refund. To 

estimate the amount of projected revenue that would be protected, IRS 

determined the dollar amount of erroneous refunds detected per FTE 

from the beginning of the 2012 tax filing season through August of that 

year. As shown in figure 6, IRS estimated the ROI for this initiative to be 

6.2 to 1 in fiscal year 2014, rising to 14.4 to 1 in fiscal year 2016.

IRS has generally calculated ROI projections for revenue 

generating initiatives based on the amount of additional tax collected. For 

each initiative, IRS calculated an estimate of the potential revenue 

collected by requested FTEs using 10 years of historical data. Because 

10 years of historical data were not available for the revenue protection 

and revenue enhancement initiatives, IRS developed new methodologies.

 18IRS develops ROI projections by dividing projected revenue by projected cost. IRS’s 

ROI calculations do not reflect benefits from improved voluntary compliance and taxpayer 

compliance costs. IRS’s ROI estimates provide useful information but-given the limits of 

current data, are not complete estimates of benefits and costs.

IRS Developed New 

Revenue Protection 

and Revenue 

Enhancement ROI 

Projections
Page 20 GAO-13-835 IRS 2014 Budget

Figure 6: Projected ROI for Improve Identification and Prevention of Refund Fraud 

and Identity Theft Initiative

The fiscal year 2014 budget for IRS also requests $51.7 million for a 

“Leverage Data to Improve Case Selection” initiative. According to IRS, if 

funded, this initiative would enhance revenue by improving technology 

that would enable IRS to improve case selection, issue identification, and 

enforcement case treatment. This technology would also allow IRS to 

adapt quickly to changing taxpayer behavior and tax code misuse. To 

estimate the additional amount of projected revenue that would be 

generated by this initiative, IRS studied the impact of using certain 

electronically filed data in a new way to examine selected tax returns and 
Page 21 GAO-13-835 IRS 2014 Budget

found that it could help classifiers detect more noncompliance.19 Based 

on the study’s findings, IRS estimated that using certain electronically 

filed data would increase examination assessments for taxpayers at all 

income levels, and used that estimate to calculate the amount of 

additional revenue that could be collected as a result of the “Leverage 

Data to Improve Case Selection” initiative. As shown in figure 7, IRS 

estimated an initial cost of $52 million in fiscal year 2014 followed by an 

estimated ROI of 1.3 to 1 in fiscal year 2015 and 1.5 to 1 in fiscal year 

2016.20

 19In May 2013, we recommended that IRS make all data from certain electronically 

submitted tax returns available to examiners conducting classification. See Tax 

Administration: IRS Could Improve Examinations by Adopting Certain Research Program 

Practices, GAO-13-480 (Washington, D.C.: May 24, 2013).

20IRS officials have told us that ROI is not the only factor used in determining which new 

initiatives to request funding for. The “Leverage Data to Include Case Selection” initiative 

includes a pilot in which future policy decisions will be made based on the research 

results. For fiscal year 2014, IRS requested funding for two other enforcement initiatives 

for which no ROI was provided, “Build Out Tax Return Preparer Compliance Activities”

and “Leverage Digital Evidence for Criminal Investigation.”
Page 22 GAO-13-835 IRS 2014 Budget

Figure 7: Projected ROI for Leverage Data to Improve Case Selection Initiative
Page 23 GAO-13-835 IRS 2014 Budget

In December 2012, IRS updated the PPACA cost estimate as part of its 

on-going practice to refine the cost estimate and address our prior 

recommendation.21 The updated cost estimate reflects best practices to a 

much greater extent, as shown in table 3. Unlike previous versions, the 

updated cost estimate shows significant progress, as it reflects the fullcycle cost of the program, which will total $1.89 billion from fiscal year 

2010 through 2026. With this information, budget decision makers can 

see the amount IRS plans to spend on the multi-year PPACA effort in a 

particular year, as well as an estimate of costs that remain to be funded in 

future years. According to the GAO Cost Guide, a reliable cost estimate 

must be comprehensive, well documented, accurate, and credible.22 (See 

appendix IV for our full assessment of the updated PPACA cost 

estimate.) In June 2012, we reported that IRS’s cost estimate for PPACA 

did not fully meet best practices for a reliable cost estimate.23

 21GAO, IRS 2013 Budget: Continuing to Improve Information on Program Costs and 

Results Could Aid in Resource Decision Making, GAO-12-603 (Washington, D.C.: June 8, 

2012). 

22GAO-09-3SP. 

23GAO-12-603. As a result of our previous assessment, IRS’s updated PPACA cost 

estimate specifies that it is intended to follow best practices from the GAO Cost Guide.

IRS awarded a contract to update portions of the cost estimate, and it also directed the 

contractor to follow best practices outlined in the GAO Cost Guide.

IRS Significantly 

Improved Its PPACA 

Cost Estimate, but 

Did Not Publicly 

Report Investment 

Information for the 

Fiscal Year 2014 

Budget Request

Updated PPACA Cost 

Estimate Shows 

Significant Progress, but a 

Few Areas for 

Improvement Remain
Page 24 GAO-13-835 IRS 2014 Budget

When enacted, PPACA contained 47 tax-related provisions that IRS is 

responsible for implementing with effective dates through 2018.24

Table 3: Overall Assessment of PPACA Cost Estimate Alignment with Best Practices

Meeting 

these statutory requirements has required a significant IT investment in 

new data models, databases, and IT systems and operations support. 

IRS’s PPACA cost estimate is important in determining and 

communicating a realistic view of a program’s likely cost and schedule 

outcomes that can be used to plan the work necessary to develop, 

produce, install, and support the program. The cost estimate is also 

integral to establishing and defending budget requests: it provides context 

for the $440 million requested for IRS to address PPACA requirements in 

fiscal year 2014.

Best practice Description

Overall assessment of 

October 2010 

cost estimate

Overall assessment of 

updated December 2012 

cost estimate

Comprehensive A comprehensive cost estimate ensures that cost 

elements are neither omitted nor double counted, 

and all cost-influencing ground rules and 

assumptions are detailed. 

◑ ◕

Well documented A well documented cost estimate thoroughly 

documents the process, including source data, 

clearly detailed calculations and results, and 

explanations of why particular references were 

chosen. 

◑ ◕

Accurate An accurate cost estimate is unbiased and is not 

overly conservative or optimistic. It is based on an 

assessment of most likely costs.

◑ ◑

Credible A credible cost estimate discusses any limitations of 

the analysis because of uncertainty or bias 

surrounding data or assumptions used in the cost 

estimating process.

◔ ◑

Key: ● = Meets—IRS provided complete evidence that satisfies the entire criterion; ◕= Substantially 

meets—IRS provided evidence that satisfies a large portion of the criterion; ◑= Partially meets—IRS 

provided evidence that satisfies about half of the criterion; ◔ = Minimally meets—IRS provided 

evidence that satisfies a small portion of the criterion; ○ = Does not meet—IRS provided no evidence 

that satisfies any of the criterion. See appendix I for our full scope and methodology.

Source: GAO analysis of IRS October 2010 and December 2012 PPACA cost estimates.

 24For more information on IRS’s implementation of PPACA, see Patient Protection and 

Affordable Care Act: IRS Managing Implementation Risks, but Its Approach Could Be 

Refined, GAO-12-690 (Washington, D.C.: June 13, 2012).
Page 25 GAO-13-835 IRS 2014 Budget

A few areas remain where IRS could continue to improve the reliability of 

the cost estimate to better meet best practices outlined in the GAO Cost

Guide. We found that the cost estimate only partially met best practices 

for accuracy and credibility. Specifically, we identified three deficiencies in 

the accuracy of the cost estimate. First, the cost estimate was not fully 

adjusted for inflation. IRS adjusted future costs for inflation, and 

documented inflation rates, but reported past costs in current year dollars. 

Because sunk costs were not adjusted for inflation, their contribution to 

the cost estimate is higher than it should be. In August 2013, the IRS 

Chief Financial Officer told us that, as a result of this finding, IRS has 

already revised the next update to the PPACA cost estimate to adjust 

sunk costs for inflation. Second, IRS included actual sunk costs in the 

estimate, but it did not use earned value management—a process for 

capturing actual costs and comparing them to estimated costs. Earned 

value management would enable IRS to continuously update the estimate 

to reflect actual costs. Third, the estimate shows how it varies from a 

previous estimate, but it does not explain factors behind the variance. If 

the reasons for cost variances are not captured, estimators cannot 

identify lessons learned that would improve future estimates.

We also identified three deficiencies in the credibility of the cost estimate. 

First, IRS conducted a sensitivity analysis on two cost drivers (a 

sensitivity analysis examines the effects on changing assumptions and 

estimating procedures to highlight elements that are cost-sensitive). 

However, it is not clear how the two cost drivers were selected for 

analysis or whether IRS identified the cost elements that were the most 

sensitive to change. Second, IRS developed multiple risk management 

plans and conducted a risk and uncertainty analysis, but it is unclear how 

the risk management plans were applied to address the risks identified in 

the cost estimate. In addition, IRS incorrectly treated the total funding risk 

for the entire program as equal to the sum of the risks of individual 

elements. A proper risk and uncertainty analysis is necessary to correctly 

assess the variability in the cost estimate due to program risks. Third, IRS 

did not obtain a second cost estimate. The GAO Cost Guide specifies that 

producing two cost estimates that are independent of one another is a 

best practice because the second cost estimate can validate the first and 

provide an unbiased test of whether the original cost estimate is 

reasonable.

We discussed each of these deficiencies with IRS officials, who stated 

they gained a better understanding of the criteria in the GAO Cost Guide

based on our meeting. Because it provides a sound basis for informed 

investment decision making, realistic budget formulation, and 
Page 26 GAO-13-835 IRS 2014 Budget

accountability for results, developing a reliable cost estimate that meets 

best practices is critical to PPACA’s success.

Although the IT systems used to implement PPACA (which IRS refers to 

as the ACA IT investment) meet the Department of Treasury’s (Treasury) 

definition of a major investment,25 IRS reported the investment as a nonmajor investment in fiscal year 2014. According to agency officials, IRS 

did not have time to prepare the information that is typically reported for 

major investments in the President’s fiscal year 2014 budget request. 

Unlike major investments, non-major investments are not included for 

public reporting on the OMB IT Dashboard26 and are also not required to 

be included in the “Capital Asset Summary,” referred to as an Exhibit 

300.27

In prior years, IRS’s portion of the ACA IT investment was included with 

related investments that were managed and reported by the Department 

of Health and Human Services (HHS). HHS reported ACA IT investment 

information on the Dashboard. In January 2013, at the end of the fiscal 

year 2014 budget formulation cycle, IRS’s portion of the ACA IT 

investment was split from HHS’s portion and IRS assumed responsibility 

for reporting on its portion. The Clinger-Cohen Act of 1996 requires OMB 

to establish processes to analyze, track, and evaluate the risks and 

results of major capital investments in information systems and report to 

Congress on the net program performance benefits achieved as a result 

of these investments. In addition, OMB’s Capital Programming Guide 

defines major acquisitions to include capital assets that require special 

management attention because of high costs, high risk, or a significant 

 25According to IRS, major investments are defined by Treasury as those that cost $10 

million in either the current year or budget year, or $50 million over the 5-year period 

extending from the prior year through budget year +2. 

26The IT Dashboard (https://www.itdashboard.gov/) is a website enabling federal 

agencies, industry, the general public, and other stakeholders to view details of federal IT 

investments. The purpose of the Dashboard is to provide information on the effectiveness 

of government IT programs and to support decisions regarding the investment and 

management of resources.

27The Exhibit 300, “Capital Asset Summary,” is used to justify resource requests for major 

IT investments and is intended to enable an agency to demonstrate to its own 

management (as well as to OMB) that a major investment is well planned. Exhibits 300 for 

major IRS IT investments are available on the Dashboard.

IRS Did Not Report

PPACA Investment 

Information on the OMB 

Dashboard Website
Page 27 GAO-13-835 IRS 2014 Budget

role in the administration of agency programs. According to the Treasury 

budget director and IRS officials, the ACA IT investment is expected to be 

reported as a major investment in the fiscal year 2015 budget request. 

IRS and Treasury officials also told us they plan to include an Exhibit 300 

and report ACA IT information on the OMB Dashboard.

Not reporting information on IRS’s ACA IT investment on the Dashboard 

or in an Exhibit 300 makes it more difficult to monitor and limits 

transparency. As a result, information about the implementation of 

PPAA—such as the individual projects that comprise the investment, 

evaluation history, current Exhibit 300 and cost and schedule variances—

is not as readily available to Congress and the general public.

In the fiscal year 2014 budget justification, IRS included new, useful 

information on its major IT investments that was not included in prior 

budget justifications, such as life-cycle costs,28

In addition to the budget justification, information on major IT investments 

is also presented in other budget related documents, including the Exhibit 

300. Exhibit 300s are developed by agencies and reviewed by OMB for 

each major IT investment. OMB sets forth requirements for the Exhibit 

300 in its Circular A-11. Exhibit 300s are publicly available, with some 

sensitive information redacted on the Dashboard.

projected useful life of the 

current asset, anticipated benefits, and how performance will be 

measured. This additional information is a significant enhancement to 

information provided in prior budget justifications, and provides decision 

makers with more context on IRS’s portfolio of IT investments. However, 

IRS does not provide information on IT investments in a consolidated 

format. IT is a significant portion—about 20 percent—of the total IRS 

budget request for fiscal year 2014. It includes approximately $2.6 billion 

to fund 18 major IT investments and 131 non-major investments. (See 

appendix V for a summary of the major IT investments.)

29

 28Life-cycle costs are the overall estimated costs (including direct and indirect initial costs 

plus any periodic or continuing costs of operation and maintenance), both government and 

contractor, for a particular program alternative over the time period corresponding to the 

life of the program.

In some instances, 

the type of information reported in the budget justification is also reported 

29Redacted Exhibit 300s do not include sensitive data, such as estimated obligations for 

future budget years, names and contact information, and operational risks. 

IRS Expanded 

Information Reported 

on Its Major IT 

Investments in the 

Fiscal Year 2014 

Budget Justification, 

but Additional 

Information Would

Be Useful
Page 28 GAO-13-835 IRS 2014 Budget

in the Exhibit 300, such as the projected useful life of the current asset. 

However, certain other information (such as the start date, funds 

obligated through the prior fiscal year, and the number of FTEs 

represented by current costs) is only available in the Exhibit 300. 

Additional information (such as percent of life-cycle costs obligated 

through the prior fiscal year) is not available in either report, but can be 

calculated with information contained in the Exhibit 300 and budget 

justification. See table 4 for a general description of the type of 

information included in the budget justification and Exhibit 300.

Table 4: Summary of IT Investment Data Presented in the Fiscal Year 2014 Congressional Budget Justification for IRS and 

Exhibit 300

Source Section name Description

Fiscal year 2014 

congressional 

justification for IRS

Capital investments Identifies and describes the investment, including the projected useful 

life (e.g., end date) and the investment phase (e.g., development, 

modernization and enhancement (DME) or operations and 

maintenance).a

Provides information on the funding source (e.g., appropriation account), 

obligations data from prior years, request for single budget year, and 

funding type for current year. 

Describes current cost and schedule performance and the anticipated 

benefit of the investment.

Fiscal year 2014 

Exhibit 300

General information Provides the investment name and Unique Investment Identifier, a 

numeric code applied to an investment that allows identification and 

tracking across multiple fiscal years of an agency’s investment portfolio.

Investment detail Describes the investment’s purpose, goals, and current or anticipated 

benefits; currently projected return on investment; progress and 

accomplishments in prior years.

Life-cycle costs Provides an overview of the costs for planning, development, 

modernization and enhancement, and operations and maintenance; fulltime equivalents for the previous, current and future fiscal years; and the 

year the investment begins and ends.

Acquisition/contract strategy Provides a list of all prime contracts or task orders for awarded or open 

solicitations.

Project plan and execution data Describes all projects, activities, and/or operations associated with the 

investment scheduled to commence or continue in the current or future 

fiscal year.

Operational data Identifies metrics associated with the investment, actual results, and risk 

assessments.

Source: Fiscal year 2014 Congressional budget justification for IRS and Office of Management and Budget Guidance on Exhibits 53 

and 300 – Information Technology and E-Government.

Notes:

a

DME is a term used by OMB to describe the program cost for new investments, changes or 

modifications to existing systems to improve capability or performance, changes mandated by the 

Congress or agency leadership, personnel costs for investment management, and direct support. For 
Page 29 GAO-13-835 IRS 2014 Budget

major IT investments, this amount should equal the sum of amounts reported for planning and 

acquisition plus the associated FTE costs reported in the Exhibit 300.

Because different information exists in different documents, decision 

makers must access multiple public documents to gain a full 

understanding of IRS’s IT priorities. For example, if a decision maker was 

interested in the Modernized e-File (MeF) IT investment, the fiscal year 

2014 budget justification would show that the projected useful life of the 

asset extends to 2019, however, to know the start date of the MeF 

investment—2001—the decision maker would also need to access the 

Exhibit 300. Likewise, the decision maker would see that the fiscal year 

2014 budget justification shows the estimated life-cycle costs for MeF to 

be $575 million, however, to know how much has been obligated for the 

investment from the start date through fiscal year 2012—$304 million—

the decision maker would have to access the Exhibit 300 and calculate 

the amount of funding obligated across prior fiscal years.

Consolidating key budget and performance information on major IT 

investments in one budget document (such as the congressional 

justification) would ensure decision makers have comprehensive, easy to 

understand information on major IT investments. In particular, 

consolidating information for complementary data elements (such as start 

date and projected useful life of the current asset, and amount of funding 

obligated through prior fiscal years and life-cycle costs) would provide 

useful context to understand IRS’s progress in implementing long-term IT 

investments. IRS officials said they can consolidate this information for 

ease of review.

GAO’s Standards for Internal Control in the Federal Government states 

that information should be communicated in a format that enables 

management and others to carry out their oversight responsibilities.30

 30GAO, Standards for Internal Control in the Federal Government, 

Further, the GPRA Modernization Act of 2010—which can serve as a 

guide to leading practices for planning at lower levels within federal 

agencies—requires that agencies consult with relevant committees when 

developing or making adjustments to their strategic plans and agency 

priority goals. Consulting with relevant committees regarding IT 

investments would provide IRS with an opportunity to share performance 

information and confirm that various committees are getting the types of 

GAO/AIMD-00-21.3.1, 

(Washington, D.C.: November 1999).
Page 30 GAO-13-835 IRS 2014 Budget

performance information needed. Congressional staffs have requested 

comprehensive, easy to understand information on IRS’s IT investments: 

providing it in a comprehensive, consolidated format could provide them 

with better information to guide decisions. Congress directed IRS to 

include a summary of cost and schedule performance information for its 

major IT investments in its budget justification for fiscal year 2013; in 

addition, starting in March 2012, IRS was required to submit a report 

after every quarter with specific information on IRS’s selected major IT 

investments, including a “plain English” explanation of the cost and 

schedule for the previous three months and the cost and schedule 

performance for the upcoming three months.31 IRS has been submitting 

these reports and briefing the Appropriations Committees and other 

congressional stakeholders. Despite the increased information in the 

budget justification and the new quarterly report, key budget and 

performance information on all of IRS’s major IT investments remains in 

various budget documents. Until such data is consolidated, it is less 

accessible to congressional stakeholders.

Since June 2012, IRS implemented six recommendations made in our 

prior reviews of its budget justification documents. Three of the 

implemented recommendations resulted in additional information in the 

budget request, such as actual ROI and linking funding requests for new 

initiatives to strategic goals and objectives. Enhanced information in the 

budget request can aid decision making and provide context to Congress 

regarding how current operations and requests for new funding support 

IRS priorities. Table 5 summarizes the recommendations implemented by 

IRS.

 31 See Financial Services and General Government Appropriations Act, 2012, Pub. L. No. 

112-74, div. C, title I, 125 Stat. 786, 888 (Dec. 23, 2011). See also, H.R. Rep. No. 112-

331, at 901 (2011). .

IRS Implemented Six 

of Our Nine Prior 

Recommendations to 

Improve the Budget 

Presentation and Aid 

Decision Making
Page 31 GAO-13-835 IRS 2014 Budget

Table 5: Prior GAO Recommendations Implemented by IRS

Report Recommendation Action taken Benefit

GAO-09-754a Compare actual ROI data with projections

We recommend that the Commissioner of 

Internal Revenue take steps to develop 

ROIs for IRS’s enforcement programs 

using actual revenue and full cost data and 

to compare the actual ROIs to the 

projected ROIs included in the budget 

requests.

IRS calculated actual ROIs for 

three major enforcement 

programs—Exams, Collections, 

and Automated Underreporter—

and reported the data in the fiscal 

year 2014 congressional 

justification. 

By including data on actual ROIs 

there is a basis for assessing the 

revenue and cost impact of 

program-level changes.

GAO-10-687R Provide additional information about 

program activities

To enhance the transparency of IRS’s 

budget request, the Commissioner of 

Internal Revenue should provide additional 

information, which could be qualitative if 

necessary to avoid losing existing 

reprogramming flexibility, about the 

program activities in the budget 

justification to better indicate IRS’s 

priorities.

IRS has taken steps, such as 

setting up certain codes in its 

financial management system to 

track obligations, which allows it to 

more readily compile obligations 

data for many of its organizational 

entities and other efforts of 

interest—including program 

activities—when requested.

Information on prior year obligations 

can provide context for IRS’s new 

resource requests and facilitate 

decision making.

GAO-10-687R Link budget request to strategic 

documents

To enhance the transparency of IRS’s 

budget request, the Commissioner of 

Internal Revenue should make explicit 

linkages between initiatives and proposals 

in the budget and strategic documents.

In the fiscal year 2014 

congressional justification IRS 

included a new table that identifies 

how budget initiatives are linked to 

Department of Treasury priority 

goals and strategic goals, and IRS 

strategic goals.

By linking the budget request to 

strategic documents, Congress and 

other stakeholders are better able to 

understand IRS’s priorities to 

improve service and enforcement.

GAO-10-687R Describe noteworthy changes in 

performance goals

In the budget justification, explain 

noteworthy changes in performance goals 

that reflect changes from previous 

performance and describe the impact on 

funding.

IRS included some linkages 

between performance goals and 

funding, identifying some instances 

where funding impacted the level 

of performance, such as telephone 

level of service. IRS budget 

officials noted they plan to continue 

providing this type of information in 

future years.

Clear linkages between 

performance goals and funding can 

help determine how funded 

activities contribute to operational 

goals and to specific measures. 

These linkages can also illustrate 

how targets align with funding and 

how efficiently resources are used.
Page 32 GAO-13-835 IRS 2014 Budget

Report Recommendation Action taken Benefit

GAO-11-547 Systematically identify savings and 

efficiencies

To improve the usefulness of the budget 

request for IRS, the Commissioner of 

Internal Revenue should further expand 

efforts to systematically identify savings 

and efficiencies as part of its budget 

development process on a periodic, but 

not necessarily annual, basis.

In fiscal years 2013 and 2014 

budget formulation guidance, the 

IRS Corporate Budget Office 

instructed business units to identify 

specific and achievable savings 

and efficiencies, estimate cost 

savings, and describe associated 

assumptions. In addition, IRS 

established task forces and 

working groups to restructure and 

streamline operations, and 

solicited employees for costreduction suggestions. 

By developing a more systematic 

process, IRS is better positioned to 

identify savings and efficiencies.

GAO-12-603 Update the PPACA cost estimate

To continue to improve information on 

program costs and results that could aid in 

resource decision making, the 

Commissioner of Internal Revenue should 

ensure that an updated PPACA cost 

estimate is completed by September 2012 

in accordance with best practices in the 

GAO Cost Guide.

IRS updated the PPACA cost 

estimate which now meets best 

practices to a greater extent. 

Specifically, the cost estimate 

substantially meets two, and 

partially meets two, of the four 

characteristics of a reliable cost 

estimate. For example, the cost 

estimate now includes full life-cycle 

costs.

By fully accounting for life-cycle

costs, management has better 

information to plan program 

resource requirements and make 

wise decisions.

Source: GAO analysis of prior GAO reports on IRS’s budget request.

Notes:

a

We previously reported this recommendation as partially implemented in GAO-12-603.

As shown in table 6, IRS officials agreed with two of the three budget 

related recommendations that remain open. IRS initially disagreed with 

our recommendation to modify its funding request for new hires. 

However, in August 2013, IRS Corporate Budget officials told us that IRS 

is considering options to implement the recommendation, including 

possibly describing in the operating plan how it plans to use available 

funds not needed for new hires in the first year.

Table 6: Budget-Related Recommendations to IRS That Remain Open 

Report Open recommendations Benefit

IRS agreed with 

recommendation

GAO-12-603 Conduct cost-effectiveness analyses

Ensure cost-effectiveness analyses are 

conducted for future significant investments 

when there are alternative approaches for 

achieving a given benefit, such as for any 

new significant PPACA projects.

Without cost effectiveness analyses, 

budget decision makers do not have 

information to compare alternatives 

and it may be difficult to determine the 

best use of resources. 

Yes. IRS officials are taking 

steps to implement this 

recommendation. 
Page 33 GAO-13-835 IRS 2014 Budget

Report Open recommendations Benefit

IRS agreed with 

recommendation

GAO-12-603 Develop a quantitative measure of scope

Develop a quantitative measure of scope, at 

a minimum for its major IT investments, in 

order to have complete information on the 

performance of these investments.

Without a quantitative measure of 

scope, IRS cannot ensure that it has a 

method for monitoring and comparing 

actual performance to planned results. 

Such a measure is a good 

management practice and provides 

Congress with information on IRS’s 

performance in delivering IT systems. 

Yes. IRS officials told us they 

have not taken any action to 

implement the 

recommendation. 

GAO-12-603 Modify funding request for new hires

Prepare funding requests for new staff based 

on estimated hiring dates.

By assuming an October 1 hire date, 

IRS’s budgeting for new staff 

overstates its labor costs and could 

result in funding being used for other 

purposes. 

No. However, as of August 

2013, officials told us they are 

considering options to 

implement the 

recommendation. 

Source: GAO analysis of prior GAO reports on IRS’s budget request.

IRS has taken important steps to include new and useful information in its 

budget justification to aid Congress and other stakeholders, including new 

information on actual ROI and enhanced information on major IT 

investments. In addition, IRS made significant improvements to the 

PPACA cost estimate, which is integral to accurately informing budget 

decision makers of the anticipated long-term costs for both 

implementation and administration of the new health care program. 

Furthermore, IRS’s new pre-selection process for determining which 

initiatives to request funding for was reported by officials to be a more 

efficient method for commencing budget formulation, although enhanced 

guidance could make it more effective. We also identified some other 

actions that could improve the budget request and aid Congress in 

decision making, including (1) improving the accuracy and credibility of 

the PPACA cost estimate in future updates because it provides the basis 

for informed investment decision making, realistic budget formulation, and 

accountability for results, (2) ensuring the ACA IT investment is publicly 

reported to increase transparency and (3) reporting consolidated 

information on major IT investments to make the information more 

accessible.

To enhance the budget process and to improve transparency, we 

recommend the Acting Commissioner of Internal Revenue take the 

following four actions:

• Improve guidance given to business units for the pre-selection budget 

formulation process, emphasizing the importance of information on 

the estimated impact—qualitative or quantitative—of proposed budget 

initiatives.

Conclusions

Recommendations for 

Executive Action
Page 34 GAO-13-835 IRS 2014 Budget

• Improve the accuracy and credibility of future updates to the PPACA 

cost estimate by taking the following actions to more closely follow 

best practices outlined in the GAO Cost Guide:

• Use earned value management to capture actual costs and use 

them as a basis for future updates.

• Explain why variances occurred between the current estimate and 

previous estimates.

• Document how cost drivers are selected for future sensitivity 

analyses.

• Conduct future risk and uncertainty analyses consistent with best 

practices, and develop and document plans to address risks.

• Validate the original cost estimate by preparing a second, 

independent cost estimate.

• Publicly report the ACA IT investment as a major investment on the 

OMB IT Dashboard and the fiscal year 2015 budget request, including 

standard cost, schedule, and performance information.

• Report key data on major IT investments in one consolidated 

document, such as the congressional justification, in consultation with 

congressional stakeholders.

We provided a draft of this report to the Acting Commissioner of the IRS 

for his review and comment. We received an email on September 18, 

2013 from the Chief Financial Officer, which included an attachment that 

provided the agency’s comments to our recommendations. This 

attachment is reprinted in appendix VI. In response to our draft report, the 

Chief Financial Officer stated that IRS agreed with three of our four 

recommendations and identified actions planned and taken to address 

them. For example, IRS agreed to include additional data on its major IT 

investments in the congressional justification, such as actual obligations 

for the investment to date. IRS agreed with the majority of the actions 

associated with our fourth recommendation on improving the accuracy 

and credibility of future updates of the PPACA cost estimate. IRS 

disagreed with two actions contained in our fourth recommendation. 

Specifically,

• IRS disagreed with our recommended action to use earned value 

management, a process that would enable IRS to continuously update 

the cost estimate to reflect actual costs. IRS stated that earned value 

management is not part of its current program management 

processes because the cost and burden to use earned value 

management outweigh the value added. We disagree with IRS’s view 

Agency Comments 

and Our Evaluation
Page 35 GAO-13-835 IRS 2014 Budget

as to the benefits of earned value management. GAO has found that 

programs that establish good earned value management systems 

realize better project management decision making and fewer cost 

and schedule overruns. While there is an upfront investment to 

establish the earned value management system, there are long-term 

benefits that go beyond the individual project, such as fostering 

accountability, improving insight into program performance, and 

providing objective information for managing the program. Further, the 

OMB Capital Programming Guide states that earned value 

management is a critical component of risk management for major 

investments.

• IRS also disagreed with our recommended action to validate the 

PPACA cost estimate by preparing a second, independent cost 

estimate. IRS stated that the cost and burden of having an external 

organization produce a second, independent cost estimate of the 

same scope would outweigh the value added. In addition, IRS stated 

that an external organization would lack the knowledge necessary to 

produce a reasonable estimate without relying heavily on the IRS 

group that produced the first estimate. We disagree with IRS’s view. 

As reflected in the GAO Cost Guide, GAO has found that producing a 

second, independent cost estimate is considered one of the best and 

most reliable methods for validating a cost estimate. Without a 

second, independent cost estimate, decision makers lack insight into 

a program’s potential costs and may lack confidence that the estimate 

is reasonable and costs described in the first estimate can be 

achieved. While preparing a second cost estimate that is independent 

of the first cost estimate requires additional resources, it is generally 

based on the same detailed technical and procurement information. 

Furthermore, an independent cost estimate does not need to be 

conducted by an external organization, but the estimation team should 

be outside the acquisition chain and have nothing at stake with regard 

to program outcome or funding decisions. The major benefit of a 

second, independent cost estimate is that it provides an objective and 

unbiased assessment of whether the original estimate can be 

achieved; reducing the risk that the program will proceed underfunded 

or costs will exceed its value.

We plan to send copies of this report to the Chairman and Ranking 

Members of other Senate and House committees and subcommittees that 

have appropriation, authorization, and oversight responsibilities for IRS. 

We are also sending copies to the Acting Commissioner of Internal

Revenue, the Secretary of the Treasury, and the Chairman of the IRS 
Page 36 GAO-13-835 IRS 2014 Budget

Oversight Board. Copies are also available at no charge on the GAO web 

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

If you or your staffs have further questions or wish to discuss the material 

in this report further, please contact me at (202) 512-9110 or 

mctiguej@gao.gov. Contact points for our offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made major contributions to this report are listed in 

appendix VII.

James R. McTigue, Jr.

Director, Tax Issues

Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-13-835 IRS 2014 Budget

We were asked to review the President’s fiscal year 2014 budget request 

for the Internal Revenue Service (IRS). The objectives of this report were 

to (1) describe IRS’s capacity to report fiscal year 2012 obligations and 

full-time equivalent (FTE) data for program activities, organizational 

entities, and other efforts of interest; (2) assess IRS’s process and the 

type of information used to prioritize and select new program initiatives; 

(3) describe proposed base budget savings; (4) describe IRS’s new 

projected return on investment (ROI) methodologies; (5) evaluate steps 

IRS took to improve the cost estimate for the Patient Protection and 

Affordable Care Act (PPACA) in accordance with GAO’s Cost Estimating 

and Assessment Guide1

To describe IRS’s capacity to report fiscal year 2012 obligations and FTE 

data, we reviewed documentation related to IRS budget formulation and 

budget execution, including IRS’s Financial Management Codes 

Handbook, IRS’s organizational chart, and its fiscal year 2014 

congressional budget justification. We also interviewed knowledgeable 

officials in IRS’s Corporate Budget Office. We selected eight program 

activities, organizational entities, and efforts of interest for analysis: (1) 

Appeals, (2) Identity Theft, (3) International Exam and Collections, (4) 

Merchant Card and Basis Matching and the related Information Reporting 

and Document Matching (IRDM) IT system, (5) Offshore Voluntary 

Disclosure Program, (6) Online Services, (7) Telephone and 

Correspondence Services, and (8) Wage and Investment. We selected 

this list based on the following criteria: whether it was included in the 

proposed fiscal year 2014 budget initiatives, whether it was the topic of 

prior GAO work, and whether the selected list (as a whole) spans most of 

IRS’s appropriation accounts and encompasses a range of methods by 

which the data can be obtained from IRS’s financial management system. 

To determine IRS’s capacity to compile fiscal year 2012 obligations data 

for these eight items, we interviewed knowledgeable officials in IRS’s 

Corporate Budget Office. From the eight selected program activities, 

and determine the extent to which IRS is 

transparently reporting on the Affordable Care Act (ACA) information 

technology (IT) investment; (6) summarize IRS’s major IT investments 

and assess the type of information available in the congressional 

justification; and (7) describe IRS’s progress in implementing our prior 

budget-related recommendations.

 1

GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs (Supersedes GAO-07-1134SP), GAO-09-3SP

(Washington, D.C.: Mar. 2, 2009).

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-13-835 IRS 2014 Budget

organizational entities, and other efforts of interest, we selected two 

illustrative examples to report fiscal year 2012 obligations data and to 

show how IRS’s budget formulation and budget execution structures 

interact: Appeals, and Wage and Investment. We selected these two 

examples largely to demonstrate the differences in structures. While they 

are both fund centers in IRS’s budget execution structure that manage 

and distribute funds, Appeals is also a program activity in IRS’s budget 

formulation structure and shows a relatively simple relationship between 

these structures. In contrast, Wage and Investment is a complex fund 

center that receives funding from many segments of IRS’s budget 

formulation structure. We assessed the reliability of IRS’s fiscal year 2012 

obligations data by reviewing relevant IRS documents, including the 

Financial Management Codes Handbook, as well as prior work we 

conducted that assesses IRS’s financial statements.2

To assess IRS’s process and the type of information used to prioritize and 

select new program initiatives, we reviewed IRS documents related to its 

pre-selection budget formulation process for fiscal year 2014. Documents 

included guidance from the IRS Corporate Budget Office and preselection templates submitted for review by the taxpayer services and 

enforcement business units to senior leadership between November 2011 

and May 2012. We analyzed these submissions for completeness against 

criteria for budget formulation outlined in OMB Circulars A-94.

We believe that the 

data are sufficiently reliable for our purposes. We identified some 

limitations, but they do not affect our illustrative use of the data and are 

discussed in our report.

3

To describe proposed base budget savings, we reviewed the fiscal year 

2014 congressional budget justification for IRS. To determine the 

processes followed to identify savings and efficiencies, we also

interviewed IRS officials in the IRS Corporate Budget Office and from the 

Large Business and International division. We analyzed documents 

obtained from IRS on its proposed fiscal year 2014 budget savings and 

We also 

interviewed IRS officials familiar with the pre-selection process.

 2

See GAO, Financial Audit: IRS’s Fiscal Years 2012 and 2011 Financial Statements, 

GAO-13-120 (Washington, D.C.: Nov. 9, 2012).

3

Office of Management and Budget, Revised, Guidelines and Discount Rates for BenefitCost Analysis for Federal Programs, OMB Circular No. A-94, (Revised October 1992). 
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-13-835 IRS 2014 Budget

efficiencies, such as human capital, space optimization, and IT 

infrastructure summaries.

To describe IRS’s new projected ROI methodologies (of revenue 

protection and revenue enhancement) included in the fiscal year 2014 

budget request, we discussed the difference between the new 

methodologies and IRS’s other projected ROI calculations with officials in 

IRS’s Office of Compliance Analytics and Corporate Budget Office. We 

also reviewed a related briefing developed by the Office of Compliance 

Analytics that summarizes the extent to which the use of non-transcribed 

electronic data impacts the classification of cases.4

To evaluate steps IRS took to improve the PPACA cost estimate, we 

compared IRS’s updated PPACA cost estimate, completed in December 

2012, with the characteristics of a high-quality cost estimate, identified in 

the GAO Cost Estimating and Assessment Guide (Cost Guide).

5

To assess the transparency of IRS’s reporting on the ACA IT investment, 

we reviewed information reported by the Department of Treasury 

(Treasury) on its capital investments, including the Office of Management 

and Budget (OMB) IT Dashboard. We also interviewed IRS and Treasury 

officials to obtain their views on PPACA management and reporting. To 

Our Cost 

Guide identifies four characteristics of a high quality cost estimate. The 

cost estimate should be (1) comprehensive, (2) well documented, (3) 

accurate, and (4) credible. We calculated the assessment rating of each 

criterion within the four characteristics by assigning each an individual 

assessment rating as follows: does not meet = 1, minimally meets = 2, 

partially meets = 3, substantially meets = 4, and meets = 5. We then 

averaged the individual practice scores to determine the overall rating. 

We shared our preliminary analysis of the updated PPACA cost estimate 

with program officials. When warranted, we updated our analyses based 

on the agency’s response and additional documentation provided to us.

 4

Because it is IRS’s policy to treat paper-filed returns the same as electronically filed 

returns, IRS does not use data that is not transcribed from paper returns in its 

classification process. This process determines, in part, whether a return should be 

selected for examination, what issues should be examined, and how the examination 

should be conducted.

5

See GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs (Supersedes GAO-07-1134SP), GAO-09-3SP

(Washington, D.C.: Mar. 2, 2009).
Appendix I: Objectives, Scope, and 

Methodology

Page 40 GAO-13-835 IRS 2014 Budget

perform our assessment, we used relevant criteria on reporting capital 

investment information, including the Clinger-Cohen Act of 1996 and the 

OMB Capital Programming Guide.6

To summarize IRS’s major IT investments (defined by Treasury as 

investments costing $10 million in either current year or budget year, or 

$50 million over the 5-year period extending from the prior year through 

the budget year +2) and to assess the type of information available in the 

congressional justification, we reviewed fiscal year 2013 and 2014 

congressional budget justifications, Exhibit 300s—capital asset 

summaries—prepared by IRS for major IT investments, as well as IRS 

and OMB guidance on preparing those documents, such as the Office of 

Management and Budget Guidance on Exhibits 53 and 300—Information 

Technology and E-Government. We identified the type of information that 

is available across budget documents, in particular key information such 

as cost to date, full time equivalents, life-cycle costs, start date and end 

date.

To describe IRS’s progress in implementing our prior budget-related 

recommendations, we obtained information from various IRS officials and 

reviewed relevant documentation, including the fiscal year 2014 

congressional budget justification and IRS’s Joint Audit Management 

Enterprise System (JAMES) reports, which track IRS actions taken to 

implement GAO recommendations. We then determined which 

recommendations were implemented.

We conducted our work in Washington, D.C., where key IRS officials 

involved with the budget and IT systems are located.

We conducted this performance audit from October 2012 to September 

2013 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

 6

40 U.S.C. § 11302(c). Office of Management and Budget, Capital Programming Guide: 

Planning, Budgeting, and Acquisition of Capital Assets, Supplement to Circular A-11, 

(Washington, D.C.: August 2011).
Appendix II: Non-Interactive Version of Figure 

1: IRS’s Budget Formulation Structure

Page 41 GAO-13-835 IRS 2014 Budget

Budget activity Program activities

Pre-filing taxpayer assistance and 

education

• Pre-filing services management

• Taxpayer communication and education

• Media and publications

• Taxpayer advocacy

• Account management and assistance, field assistance

• Taxpayer advocate case processing

• Wage and investment headquarters management and administration

• National distribution center

Filing and account services • Filing and account services management

• Submission processing

• Account management and assistance, electronic and correspondence 

assistance

• Electronic products and services support

• Electronic tax administration

• Pre-refund

• Health insurance tax credit administration

• Joint operations center

• Files most efficient organization

• Emergency response funds

Investigations • General management and administration

• Criminal investigations

• Criminal tax legal support

• International investigations

Exam and collections • Compliance services management

• Payment compliance, correspondence collection

• Automated collection and support

• Payment compliance, field collection

• Tax reporting compliance, document matching

• Tax reporting compliance, electronic and correspondence exam

• Tax reporting compliance, field exam

• Fraud and Bank Secrecy Act

• Appeals

• Litigation

• Specialty programs, exams

• International collection

• International exams

• Unit general management and administration

• Earned income tax credit management and administration

• Accounts management taxpayer assurance program

• Whistleblower

• Communications and liaison

Appendix II: Non-Interactive Version of 

Figure 1: IRS’s Budget Formulation Structure
Appendix II: Non-Interactive Version of Figure 

1: IRS’s Budget Formulation Structure

Page 42 GAO-13-835 IRS 2014 Budget

Budget activity Program activities

Regulatory • Tax law interpretation and published guidance

• General legal services

• Rulings and agreements

• International regulatory legal support

• Return preparer strategy

• Office of professional responsibility

• Emergency response funds

Infrastructure • Building delegation

• Rent

• Space and housing, non-information technology equipment

• Security

Shared services and support • National headquarters management and administration

• Real estate and facilities management

• Procurement

• Equity, diversity, and inclusion field services

• Communications and liaison

• Employee support services

• Treasury complaint centers

• Shared support not provided by agency-wide shared services

• Printing and postage, media and publications

• Statistics of income

• Research

• Security administration and management

• Wage and investment business modernization support

• Benefit payments

• Shared services 
Appendix II: Non-Interactive Version of Figure 

1: IRS’s Budget Formulation Structure

Page 43 GAO-13-835 IRS 2014 Budget

Budget activity Program activities

Information services • Security services

• Tier B

• Management services

• National headquarters information technology management

• Affordable Care Act program management office

• Information technology executive oversight

• Application development

• Enterprise operations

• Enterprise network

• Enterprise services

• User and network services

• Strategy and planning

• Information technology security certification and accreditation

• Disaster recovery

• Information technology security training

• Information technology homeland security Presidential Directive 12

• Information technology infrastructure

• Treasury working capital fund

• Integrated document solutions enterprise

• Emergency response funds

Information technology investments • Business systems modernization management

• Tier A

• Customer account data engine II

• Move toward more timely service and enforcement

• Integrated financial systems

• Custodial accounting project

• E-Services

• Filing and payment compliance

• Modernized e-file

• Customer account data engine

• Infrastructure

• Program level initiatives

• Management reserve

• Accounts management services

Source: GAO analysis of IRS documents.

Note: The number of program activities varies from one fiscal year to the next as IRS adjusts its 

budget formulation structure to address emerging priorities. Program activities are described in detail 

in the fiscal year 2014 congressional budget justification for IRS.
Appendix III: Figure 8: Pre-selection Budget 

Formulation Process—Sample Template

Page 44 GAO-13-835 IRS 2014 Budget

Note: Acronyms are as follows: RA = Revenue Agent; TE = Tax Examiner; RO = Revenue Officer; 

Mgr = Manager; SPT = Specialists; FTE = Full Time Equivalent; and LOS = Level of Service

Appendix III: Figure 8: Pre-selection Budget 

Formulation Process—Sample Template
Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate

Page 45 GAO-13-835 IRS 2014 Budget

Figures 9 through 12 outline our assessment of the extent to which IRS’s 

updated, December 2012 Patient Protection and Affordable Care Act 

(PPACA) cost estimate meets best practices. This information is repeated 

in table 7, following the graphics.

Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate
Interactive graphic

Page 46 GAO-13-835 IRS 2014 Budget

Rollover each below to see further information on cost estimation best practices.

Directions:

Print instructions

Source: GAO analysis of IRS’s updated December 2012 PPACA cost estimate and GAO-09-3SP.

A comprehensive cost estimate:

Best practices characteristics Assessment of whether best practices are met

Figure 9: PPACA Cost Estimate Alignment with Best Practices for Comprehensiveness

Effect

Completely defines the 

program, reflects the current 

schedule, and is technically 

reasonable. 

Includes all life-cycle costs. 

Has a product-oriented work 

breakdown structure (WBS), 

traceable to the program’s 

technical scope at an

appropriate level of detail. 

Documents all

cost-influencing ground

rules and assumptions.

Documentation included a description of technical 

requirements for all affordable care act components, 

with sufficient detail on the system’s purpose and 

performance characteristics. It did not explain how the 

system fit into certain other aspects of program 

management, such as personnel requirements.

Additionally, risks and their specific effects on cost 

elements, were not documented in sufficient detail. 

Substantially meets

The WBS clearly outlined the end product and major 

work of the program. It is standardized so that cost

data can be collected and used for estimating future 

programs. IRS provided a generic dictionary that

discussed major WBS elements.

Meets

The cost estimate documentation defined and

documented ground rules and assumptions. However, 

the estimate did not explain how risks trace to specific 

WBS elements and did not consider the effects of 

schedule and funding delays.

Substantially meets

(

a

)

The cost estimate included both government and 

contractor costs of the program over its full life cycle, 

from inception of the program through development, 

deployment, and operation and maintenance to its 

eventual retirement. 

Meets 

(

a

)

(

a

)

(

a

)

To print a text version of this graphic, go to table 7.

Substantially meets best practices for a

comprehensive cost estimate.

Overall assessment:

GAO overall assessment ratings:

Does not meet IRS provided no evidence that satisfies any of the criterion

Minimally meets IRS provided evidence that satisfies a small portion of the criterion

Partially meets IRS provided evidence that satisfies about half of the criterion

Substantially meets IRS provided evidence that satisfies a large portion of the criterion

Meets IRS provided complete evidence that satisfies the entire criterion.

aWe did not describe effects for characteristics scored as “meets” or “substantially meets.”
Interactive graphic

Page 47 GAO-13-835 IRS 2014 Budget

Rollover each below to see further information on cost estimation best practices.

Directions:

Print instructions

Source: GAO analysis of IRS’s updated December 2012 PPACA cost estimate and GAO-09-3SP.

A well documented cost estimate should:

Best practices characteristics Assessment of whether best practices are met

Figure 10: PPACA Cost Estimate Alignment with Best Practices for Being Well Documented

Effect

Describe the calculations

and the methodology used

to derive each element’s 

cost.

Capture the source data

used, the reliability of the

data, and how the data were 

made compatible with other 

data in the estimate.

Describe how the 

estimate was developed.

Discuss the technical

baseline description.

Provide evidence of

management review and

acceptance.

The cost estimate provided a general summary of the 

methodologies used to create it. IRS used some actual 

data from parts of the program that it already developed, 

and documented how those data were adjusted, but did 

not explain why the data were adjusted. 

Substantially meets

The estimate showed inputs to the software models, 

including data provided by subject matter experts. 

However, IRS used an incorrect method to calculate 

confidence levels for the estimate. 

Substantially meets

IRS developed a technical baseline description that is 

consistent with the cost estimate.

Meets

IRS provided evidence that staff briefed management 

on the cost estimate multiple times, and provided email 

documentation of management feedback and approval, 

but the briefings did not contain technical details of the 

cost estimate.

Substantially meets

(

a

)

(

a

)

IRS used two commercially available software models 

to develop the estimate. IRS documented some inputs, 

including labor rates and support activities, but GAO 

could not confirm whether inputs to the software models 

were appropriate for the program.

Substantially meets 

(

a

)

(

a

)

(

a

)

To print a text version of this graphic, go to table 7.

Substantially meets best practices for a well 

documented cost estimate.

Overall assessment:

GAO overall assessment ratings:

Does not meet IRS provided no evidence that satisfies any of the criterion

Minimally meets IRS provided evidence that satisfies a small portion of the criterion

Partially meets IRS provided evidence that satisfies about half of the criterion

Substantially meets IRS provided evidence that satisfies a large portion of the criterion

Meets IRS provided complete evidence that satisfies the entire criterion.

aWe did not describe effects for characteristics scored as “meets” or “substantially meets.”
Interactive graphic

Page 48 GAO-13-835 IRS 2014 Budget

Rollover each below to see further information on cost estimation best practices.

Directions:

GAO overall assessment ratings:

Does not meet	 IRS provided no evidence that satisfies any of the criterion

Minimally meets IRS provided evidence that satisfies a small portion of the criterion

Partially meets IRS provided evidence that satisfies about half of the criterion

Substantially meets	 IRS provided evidence that satisfies a large portion of the criterion

Meets	 IRS provided complete evidence that satisfies the entire criterion.

aWe did not describe effects for characteristics scored as “meets” or “substantially meets.”

Print instructions

Source: GAO analysis of IRS’s updated December 2012 PPACA cost estimate and GAO-09-3SP.

An accurate cost estimate:

Best practices characteristics Assessment of whether best practices are met

Figure 11: PPACA Cost Estimate Alignment with Best Practices for Accuracy

Effect

Is properly adjusted 

for inflation. 

Produces unbiased 

results. 

Contains few

mistakes.

Is regularly updated 

to reflect significant 

program changes.

Documents and 

explains variances 

between planned and 

actual costs.

Reflects cost

estimating

experiences from

comparable

programs.

The estimating

technique for each 

cost element was used 

appropriately.

IRS adjusted future costs for inflation, and documented

inflation rates, but reported past costs in current year dollars.

Partially meets

Our assessment detected only one minor mistake, and IRS

confirmed that it was a typographical error.

Substantially meets

IRS updates the PPACA cost estimate annually. The estimate

included sunk costs incurred through September 2012. IRS did

not use Earned Value Management, which would enable it to

continuously incorporate actual cost and schedule information.

Partially meets

The estimate showed how it varies from a previous estimate, but

it did not explain factors behind the variances.

Minimally meets

IRS collected sunk cost data from the program’s initiation in

fiscal year 2010 through September 2012 and used those data

to inform the estimate. IRS also used historical data from other

comparable programs.

Substantially meets

IRS used commercially available models to estimate software

development costs, which is a reasonable method.

Substantially meets

If a cost estimate is not properly updated on a regular basis, it

cannot provide decision makers with accurate information for

assessing alternative decisions.

Without a documented comparison between the current

estimate (updated with actual costs) and the old estimate, cost

estimators cannot determine the level of variance between the

two estimates. That is, the estimators cannot see how well they

are estimating and how the program is changing over time.

(a)

(

a

)

IRS developed the cost estimate at an 80 percent confidence

level, which is slightly conservative compared to best practices,

which call for estimates to fall between 55 percent and 65

percent confidence levels. 

Substantially meets 

(

a

)

Adjusting for inflation is important because in the development

of an estimate, cost data must be expressed in like terms. If

a mistake is made or the inflation amount is not correct, cost

overruns can result.

(a)

To print a text version of this graphic, go to table 7.

Partially meets best practices for an accurate

cost estimate.

Overall assessment:
Interactive graphic

Page 49 GAO-13-835 IRS 2014 Budget

Rollover each below to see further information on cost estimation best practices.

Directions:

Print instructions

Source: GAO analysis of IRS’s updated December 2012 PPACA cost estimate and GAO-09-3SP.

A credible cost estimate includes:

Best practices characteristics Assessment of whether best practices are met

Figure 12: PPACA Cost Estimate Alignment with Best Practices for Credibility

Effect

A risk and uncertainty 

analysis.

A sensitivity analysis that 

identifies a range of possible 

costs based on varying

inputs.

Cross-checking of major

cost elements.

A comparison to an

independent cost estimate 

conducted by another

organization.

IRS developed multiple risk management plans and 

conducted a risk and uncertainty analysis, but it is 

unclear how the risk management plans are applied 

to address the risks identified in the cost estimate. In 

addition, IRS incorrectly treated the total funding risk for 

the entire program as equal to the sum of the risks of 

individual elements.

Partially meets

IRS provided a table showing how cost elements were 

cross-checked, but did not provide supporting

documentation. 

Substantially meets

IRS did not prepare a second cost estimate to validate 

the original estimate and thus provide assurance of its 

quality. 

Minimally meets

Preparing two cost estimates is considered one of the best 

and most reliable methods for validation. It provides an 

independent view of expected program costs that tests the 

original estimate for reasonableness. Without a second cost 

estimate, decision makers will lack insight into a program’s 

potential costs because cost estimates frequently use

different methods. 

IRS assessed two cost drivers for its sensitivity analysis: 

labor mix and development team capability. However, 

it is not clear how those cost drivers were identified. 

Partially meets 

Without a sensitivity analysis that reveals how the cost

estimate is affected by a change in a single assumption, the 

cost estimator will not fully understand which variable most 

affects the cost estimate.

For management to make good decisions, the program 

estimate must reflect the degree of uncertainty, so that a level 

of confidence can be given about the estimate. An estimate 

without risk and uncertainty analysis is unrealistic because 

it does not assess the variability in the cost estimate from 

such effects as schedules slipping, missions changing, and 

proposed solutions not meeting users’ needs.

(a)

To print a text version of this graphic, go to table 7.

Partially meets best practices for a credible 

cost estimate.

Overall assessment:

GAO overall assessment ratings:

Does not meet IRS provided no evidence that satisfies any of the criterion

Minimally meets IRS provided evidence that satisfies a small portion of the criterion

Partially meets IRS provided evidence that satisfies about half of the criterion

Substantially meets IRS provided evidence that satisfies a large portion of the criterion

Meets IRS provided complete evidence that satisfies the entire criterion.

aWe did not describe effects for characteristics scored as “meets” or “substantially meets.”
Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate

Page 50 GAO-13-835 IRS 2014 Budget

Table 7: Non-Interactive Version of Figures 9 through 12: PPACA Cost Estimate Alignment with Best Practices Outlined in the 

GAO Cost Guide

Best practices characteristics Overall assessment

Assessment of whether 

best practices are met Effect

(1) A comprehensive cost estimate: Substantially meets 

best practices for a 

comprehensive cost 

estimate

Includes all life-cycle costs.

A life-cycle cost estimate provides a 

complete and structured accounting 

of all resources and associated cost 

elements required to develop, 

produce, deploy, and sustain a 

particular program. It should cover 

the inception of the program through 

its retirement.

The cost estimate included both 

government and contractor costs 

of the program over its full life 

cycle, from inception of the 

program through development, 

deployment, and operation and 

maintenance to its eventual 

retirement. (Meets.)

(

a

)

Completely defines the program, 

reflects the current schedule, and is 

technically reasonable.

The cost estimate should be based 

on a documented technical baseline 

description, which provides a 

common definition of the program, 

including detailed technical, 

program, and schedule descriptions 

of the system. 

Documentation included a 

description of technical 

requirements for all affordable 

care act components, with 

sufficient detail on the system’s 

purpose and performance 

characteristics. It did not explain 

how the system fits into certain 

other aspects of program 

management, such as personnel 

requirements. Additionally, risks 

and their specific effects on cost 

elements were not documented in 

sufficient detail. (Substantially 

meets.)

(

a

)

Has a product-oriented work 

breakdown structure (WBS), 

traceable to the program’s technical 

scope at an appropriate level of 

detail.

A WBS provides a basic framework 

for a variety of related activities like 

estimating costs, developing 

schedules, identifying resources and 

potential risks, and providing the 

means for measuring program status 

using earned value management 

(EVM). It is product-oriented if it 

allows a program to track cost and 

schedule by defined deliverables, 

such as a hardware or software 

component.

The WBS clearly outlined the end 

product and major work of the 

program. It is standardized so 

that cost data can be collected 

and used for estimating future 

programs. IRS provided a generic 

dictionary that discussed major 

WBS elements. (Meets.)

(

a

)
Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate

Page 51 GAO-13-835 IRS 2014 Budget

Best practices characteristics Overall assessment

Assessment of whether 

best practices are met Effect

Documents all cost-influencing 

ground rules and assumptions.

Cost estimates are typically based 

on limited information and therefore 

need to be bound by ground rules 

and assumptions. Ground rules are 

a set of estimating standards that 

provide guidance and common 

definitions, while assumptions are 

judgments about past, present, or 

future conditions that may affect the 

estimate. Any risks associated with 

assumptions should be identified 

and traced to specific WBS 

elements.

The cost estimate documentation 

defined and documented ground 

rules and assumptions. However, 

the estimate did not explain how 

risks trace to specific WBS 

elements and did not consider the 

effects of schedule and funding 

delays. (Substantially meets.)

(

a

)

(2) A well documented cost 

estimate should:

Substantially meets best 

practices for a well 

documented cost 

estimate.

Capture the source data used, the 

reliability of the data, and how the 

data were made compatible with 

other data in the estimate.

Data should be collected from 

primary sources. The source, 

content, time, and units should be 

adequately documented. Further, 

data should be analyzed to 

determine accuracy and reliability, 

and to identify cost drivers.

IRS used two commercially 

available software models to 

develop the estimate. IRS 

documented some inputs, 

including labor rates and support 

activities, but GAO could not 

confirm whether inputs to the 

software models were appropriate 

for the program. (Substantially 

meets.)

(

a

)

Describe the calculations and the 

methodology used to derive each 

element’s cost.

Documentation should describe what 

calculation methods are used, as 

well as how they were applied, and 

explain any anomalies.

The cost estimate provided a 

general summary of the 

methodologies used to create it. 

IRS used some actual data from 

parts of the program that it 

already developed, and 

documented how those data were 

adjusted, but did not explain why 

the data were adjusted. 

(Substantially meets.)

(

a

)

Describe how the estimate was 

developed.

The data supporting the estimate 

should be available and adequately 

documented so that the estimate can 

be easily updated to reflect actual 

costs or program changes. 

The estimate showed inputs to 

the software models, including 

data provided by subject matter 

experts. However, IRS used an 

incorrect method to calculate 

confidence levels for the 

estimate. (Substantially meets.)

(

a

)
Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate

Page 52 GAO-13-835 IRS 2014 Budget

Best practices characteristics Overall assessment

Assessment of whether 

best practices are met Effect

Discuss the technical baseline 

description.

A technical baseline description 

provides a common definition of the 

program, including detailed 

technical, program, and schedule 

descriptions of the system, for a cost 

estimate to be built on. The data in 

the technical baseline should be 

consistent with the cost estimate.

IRS developed a technical 

baseline description that is 

consistent with the cost estimate. 

(Meets.)

(

a

)

Provide evidence of management 

review and acceptance.

There should be a briefing to 

management, including a clear 

explanation of how the cost estimate 

was derived. Management’s 

acceptance of the cost estimate 

should be documented.

IRS provided evidence that staff 

briefed management on the cost 

estimate multiple times, and 

provided email documentation of 

management feedback and 

approval, but the briefings did not 

contain technical details of the 

cost estimate. (Substantially 

meets.)

(

a

)

(3) An accurate cost estimate: Partially meets best 

practices for an 

accurate cost estimate.

Produces unbiased results.

Cost estimates should have an 

uncertainty analysis, which 

determines where the estimate falls 

against the range of all possible 

costs. 

IRS developed the cost estimate 

at an 80 percent confidence level, 

which is slightly conservative 

compared to best practices, 

which call for estimates to fall 

between 55 percent and 65 

percent confidence levels. 

(Substantially meets.)

(

a

)

Is properly adjusted for inflation.

Cost data should be adjusted for 

inflation to ensure that comparisons 

and projections are valid. Data 

should also be normalized to 

constant year dollars to remove the 

effects of inflation. Also, inflation 

assumptions must be well 

documented.

IRS adjusted future costs for 

inflation, and documented 

inflation rates, but reported past 

costs in current year dollars. 

(Partially meets.)

Adjusting for inflation is important 

because in the development of an 

estimate, cost data must be 

expressed in like terms. If a 

mistake is made or the inflation 

amount is not correct, cost 

overruns can result.

Contains few mistakes.

Results should be checked for 

accuracy, double counting, and 

omissions. Validating that a cost 

estimate is accurate requires 

thoroughly understanding and 

investigating how the cost model 

was constructed.

Our assessment detected only 

one minor mistake, and IRS 

confirmed that it was a 

typographical error. (Substantially 

meets.)

(

a

)
Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate

Page 53 GAO-13-835 IRS 2014 Budget

Best practices characteristics Overall assessment

Assessment of whether 

best practices are met Effect

Is regularly updated to reflect 

significant program changes.

The cost estimate should be updated 

to reflect significant program 

changes, such as changes to 

schedules or other assumptions. 

Updates should also reflect actual 

costs so that the estimate always 

reflects the current program status.

IRS updates the PPACA cost 

estimate annually. The estimate 

included sunk costs incurred 

through September 2012. IRS did 

not use Earned Value 

Management, which would 

enable it to continuously 

incorporate actual cost and 

schedule information. (Partially 

meets.)

If a cost estimate is not properly 

updated on a regular basis, it 

cannot provide decision makers 

with accurate information for 

assessing alternative decisions.

Documents and explains variances 

between planned and actual costs.

Variances between planned and 

actual costs should be documented, 

explained, and reviewed. For any 

elements whose actual costs or 

schedules differ from the estimate, 

the estimate should discuss 

variances and lessons learned.

The estimate showed how it 

varies from a previous estimate, 

but it did not explain factors 

behind the variances. (Minimally 

meets.)

Without a documented 

comparison between the current 

estimate (updated with actual 

costs) and the old estimate, cost 

estimators cannot determine the 

level of variance between the two 

estimates. That is, the estimators 

cannot see how well they are 

estimating and how the program 

is changing over time.

Reflects cost estimating experiences 

from comparable programs.

The estimate should be based on 

historical cost estimation data and 

actual experiences from other 

comparable programs. These data 

should be reliable and relevant to the 

new program.

IRS collected sunk cost data from 

the program’s initiation in fiscal 

year 2010 through September 

2012 and used those data to 

inform the estimate. IRS also 

used historical data from other 

comparable programs.

(Substantially meets.)

(

a

)

The estimating technique for

each cost element was used 

appropriately.

A variety of techniques can be used 

to estimate costs, including 

extrapolating from actual costs, 

expert opinion, and analogy to other 

programs. Estimators should use an 

appropriate technique for each cost 

element.

IRS used commercially available 

models to estimate software 

development costs, which is a 

reasonable method. 

(Substantially meets.)

(

a

)

(4) A credible cost estimate 

includes:

Partially meets best 

practices for a credible 

cost estimate.
Appendix IV: Reliability of Patient Protection 

and Affordable Care Act Cost Estimate

Page 54 GAO-13-835 IRS 2014 Budget

Best practices characteristics Overall assessment

Assessment of whether 

best practices are met Effect

A sensitivity analysis that identifies a 

range of possible costs based on 

varying inputs.

A sensitivity analysis examines how 

changes to key assumptions and 

inputs affect the estimate. The 

estimate should identify key cost 

drivers, examine their parameters 

and assumptions, and re-estimate 

the total cost by varying each 

parameter between its minimum and 

maximum range.

IRS assessed two cost drivers for 

its sensitivity analysis: labor mix 

and development team capability. 

However, it is not clear how those 

cost drivers were identified. 

(Partially meets.)

Without a sensitivity analysis that 

reveals how the cost estimate is 

affected by a change in a single 

assumption, the cost estimator 

will not fully understand which 

variable most affects the cost 

estimate.

A risk and uncertainty analysis.

A risk and uncertainty analysis 

recognizes the potential for error and 

attempts to quantify it by identifying 

the effects of changing key cost 

drivers.

IRS developed multiple risk 

management plans and 

conducted a risk and uncertainty 

analysis, but it is unclear how the 

risk management plans are 

applied to address the risks 

identified in the cost estimate. In 

addition, IRS incorrectly treated 

the total funding risk for the entire 

program as equal to the sum of 

the risks of individual elements. 

(Partially meets.)

For management to make good 

decisions, the program estimate 

must reflect the degree of 

uncertainty, so that a level of 

confidence can be given about 

the estimate. An estimate without 

risk and uncertainty analysis is 

unrealistic because it does not 

assess the variability in the cost 

estimate from such effects as 

schedules slipping, missions 

changing, and proposed solutions 

not meeting users’ needs.

Cross-checking of major cost 

elements.

A cross-check is done by using a 

different cost estimation method to 

see if it produces similar results. 

IRS provided a table showing 

how cost elements were crosschecked, but did not provide 

supporting documentation. 

(Substantially meets.)

(

a

)

A comparison to an independent 

cost estimate conducted by another 

organization.

A second, independent cost estimate 

should be performed to validate the 

original cost estimate. It should be 

based on the same technical 

baseline, ground rules, and 

assumptions as the original 

estimate.

IRS did not prepare a second 

cost estimate to validate the 

original estimate and thus provide 

assurance of its quality. 

(Minimally meets.)

Preparing two cost estimates is 

considered one of the best and 

most reliable methods for 

validation. It provides an 

independent view of expected 

program costs that tests the 

original estimate for 

reasonableness. Without a 

second cost estimate, decision 

makers will lack insight into a 

program’s potential costs 

because cost estimates 

frequently use different methods. 

Source: GAO analysis of IRS’s updated December 2012 PPACA cost estimate and GAO-09-3SP.

Note: We determined the overall assessment rating by assigning the following ratings: Does Not Meet 

– IRS provided no evidence that satisfies any of the criterion, Minimally Meets – IRS provided 

evidence that satisfies a small portion of the criterion, Partially Meets – IRS provided evidence that 

satisfies about half of the criterion, Substantially Meets – IRS provided evidence that satisfies a large 

portion of the criterion, Meets – IRS provided complete evidence that satisfies the entire criterion.

a

We did not describe effects for characteristics scored as “meets” or “substantially meets.”
Appendix V: Summary of IRS’s Major 

Information Technology (IT) Investments

Page 55 GAO-13-835 IRS 2014 Budget

Investment name 

Fiscal 

year 2013 

FTEs 

Fiscal year 

2013 

funding 

typea

Total 

obligations 

through

fiscal 

year2012

(in millions)

Lifecycle 

costs

(in millions)

Percent of 

lifecycle 

costs 

obligated 

through 

fiscal year 

2012

Start 

Date

Projected 

useful 

life 

Account Management Services 

(AMS)

Enhances customer support by 

providing applications that enable IRS 

employees to access, validate, and 

update individual taxpayer accounts 

on demand. 82 O&M $89.0 $212.0 42.0% 2009 2019

Customer Account Data Engine 2 

(CADE 2)

Provides timely access to 

authoritative individual taxpayer 

account information and enhances 

IRS’s ability to address technology, 

security, financial material 

weaknesses, and long-term 

architectural planning and viability. 536

O&M and 

DME $540.0 $1,479.0 36.5% 2009 2019

Electronic Fraud Detection System 

(EFDS)

Assists in detecting fraud at the time 

that tax returns are filed in order to 

eliminate the issuance of fraudulent 

tax refunds. 44 O&M $92.0 $150.0 61.3% 1996 2015

e-Services (e-SVS)

Comprises several web-based selfassisted services that are intended to 

allow authorized individuals to do 

business with the IRS electronically. 37

O&M and 

DME $162.0 $211.0 76.8% 1999 2019

Foreign Account Tax Compliance 

Act (FATCA)

Intended to implement provisions of 

the Foreign Account Tax Compliance 

Act that require financial accounts 

held by U.S. taxpayers, or by foreign 

entities in which U.S. taxpayers hold 

a substantial ownership interest. 31 DME $8.0 $91.0 8.8% 2011 2019

Implement Return Review Program 

(RRP) (Replaces EFDS)

Currently under development, is 

intended to maximize fraud detection 

at the time that tax returns are filed in 

order to eliminate issuance of 

questionable refunds. 78 DME $60.0 $169.0 35.5% 2010 2019

Appendix V: Summary of IRS’s Major 

Information Technology (IT) Investments
Appendix V: Summary of IRS’s Major 

Information Technology (IT) Investments

Page 56 GAO-13-835 IRS 2014 Budget

Investment name 

Fiscal 

year 2013 

FTEs 

Fiscal year 

2013 

funding 

typea

Total 

obligations 

through

fiscal 

year2012

(in millions)

Lifecycle 

costs

(in millions)

Percent of 

lifecycle 

costs 

obligated 

through 

fiscal year 

2012

Start 

Date

Projected 

useful 

life 

Individual Master File (IMF)

Represents the authoritative data 

source for individual tax account data. 

All other IRS information systems that 

process IMF data depend on output 

from this source. This investment is a 

critical component of IRS’s ability to 

process tax returns. 37

O&M and 

DME $71.0 $108.0 65.7% 1970 2019

Information Reporting and 

Document Matching (IRDM)

Intended to establish a new business 

information matching program in 

order to increase voluntary 

compliance and accurate income 

reporting. 76

O&M and 

DME $70.0 $186.0 37.6% 2009 2019

Integrated Customer 

Communication Environment 

(ICCE)

Includes several projects that are 

intended to simplify voluntary 

compliance using voice response, 

Internet, and other computer 

technology such as the Modernized 

Internet Employee Identification 

Number, which allows third parties to 

act on the behalf of taxpayers. 73

O&M and 

DME $467.0 $534.0 87.5% 1996 2019

Integrated Data Retrieval System 

(IDRS)

Intended to provide systemic review, 

improve consistency in case control, 

alleviate staffing needs, issue notices 

to taxpayers, and allow taxpayers to 

see status of refunds. It is a missioncritical system used by 60,000 IRS 

employees. 129

O&M and 

DME $186.0 $322.0 57.8% 1973 2019

Integrated Financial System/CORE 

Financial System (IFS)

Used by IRS for budget, payroll, 

accounts payable/receivable, general 

ledger functions, and financial 

reporting; also used to report on the 

cost of operations and to manage 

budgets by fiscal year. 11

O&M and 

DME $398.0 $483.0 82.4% 2001 2019
Appendix V: Summary of IRS’s Major 

Information Technology (IT) Investments

Page 57 GAO-13-835 IRS 2014 Budget

Investment name 

Fiscal 

year 2013 

FTEs 

Fiscal year 

2013 

funding 

typea

Total 

obligations 

through

fiscal 

year2012

(in millions)

Lifecycle 

costs

(in millions)

Percent of 

lifecycle 

costs 

obligated 

through 

fiscal year 

2012

Start 

Date

Projected 

useful 

life 

Integrated Submission and 

Remittance Processing System 

(ISRP)

Processes paper tax returns, and 

updates tax forms to comply with tax 

law changes. 16

O&M and 

DME $132.0 $192.0 68.8% 1998 2019

IRS End User Systems and 

Services (EUSS)

Supports products and services 

necessary for daily functions for over 

100,000 IRS employees at 

headquarters and field sites. 1155 O&M $511.0 $1,684.0 30.3% 1970 2025

IRS Main Frames and Servers 

Services and Support (MSSS)

Intended to support the design, 

development, and deployment of 

server storage infrastructures, 

software, databases, and operating 

systems. 1586 O&M $3,620.0 $6,016.0 60.2% 1970 2025

IRS Telecommunications Systems 

and Support (TSS)

Supports IRS’s broad and local 

network infrastructure, such as 

servers and switches for voice, data, 

and video servicing of about 1,000 

IRS sites. 425 O&M $710.0 $2,583.0 27.5% 2002 2021

IRS.Gov - Portal Environment

Provides web-based services (such 

as tax filing and refund tracking) to 

internal and external users, such as 

IRS employees and other government 

agencies, taxpayers, and business 

partners. 17

O&M and 

DME $403.0 $612.0 65.8% 2009 2020

Modernized e-File (MeF)

Provides a secure web-based 

platform for electronic tax filing of 

individual and business tax and 

information returns by registered 

Electronic Return Originators. 77

O&M and 

DME $304.0 $575.0 52.9% 2001 2019
Appendix V: Summary of IRS’s Major 

Information Technology (IT) Investments

Page 58 GAO-13-835 IRS 2014 Budget

Investment name 

Fiscal 

year 2013 

FTEs 

Fiscal year 

2013 

funding 

typea

Total 

obligations 

through

fiscal 

year2012

(in millions)

Lifecycle 

costs

(in millions)

Percent of 

lifecycle 

costs 

obligated 

through 

fiscal year 

2012

Start 

Date

Projected 

useful 

life 

Service Center Recognition/Image 

Processing System (SCRIPS)

Used as a data capture, 

management, and image storage 

system using high-speed scanning 

and digital imaging to convert data 

from the 940, 941, K-1, and paper 

returns from Information Returns 

Processing into electronic format. 15

O&M and 

DME $145.0 $195.0 74.4% 1993 2019

Source: GAO analysis of IRS’s fiscal year 2014 congressional budget justification and Exhibit 300A data.

a

O&M = Operations and Maintenance; DME = Development, Modernization, and Enhancement.
Appendix VI: Comments from the

Internal Revenue Service

Page 59 GAO-13-835 IRS 2014 Budget

Appendix VI: Comments from the

Internal Revenue Service
Appendix VI: Comments from the

Internal Revenue Service

Page 60 GAO-13-835 IRS 2014 Budget
Appendix VII: GAO Contact and Staff 

Acknowledgments

Page 61 GAO-13-835 IRS 2014 Budget

James R. McTigue, Jr. (202) 512–9110, mctiguej@gao.gov

In addition to the contact named above, Libby Mixon, Assistant Director; 

Remmie Arnold, Amy Bowser, Jennifer Echard, Emile Ettedgui, Mary 

Evans, Chuck Fox, Paul Middleton, Donna L. Miller, Edward Nannenhorn, 

Karen O’Conor, Sabine Paul, Laurel Plume, Karen Richey, Erinn L. 

Sauer, Cynthia Saunders, and Robert Yetvin made major contributions to 

this report.

Appendix VII: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(451022)
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