IRS Modernization: Continued Progress Requires Addressing Resource Management Challenges
Published: 2005-05-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since the passage of the IRS Restructuring and Reform Act of 1998 (RRA 98), the Internal Revenue Service (IRS) has faced the challenge of managing its resources to simultaneously improve service to taxpayers, assure taxpayers' compliance with the tax laws, and modernize its antiquated information systems. As requested, this statement provides our assessment of IRS's current performance in the areas of taxpayer service, tax law enforcement, and systems modernization. Looking ahead, this statement also describes the challenges that IRS faces in addressing resource constraints as well as realizing efficiency and information systems improvements.
section_title: What GAO Found
paragraphs: IRS's most noticeable progress has been in IRS's taxpayer service, which has been of special concern to the Congress. Since the passage of RRA 98, improvements in access to IRS by telephone, the accuracy of answers given to taxpayer inquiries, and the growth of IRS's Web site, which now provides a variety of services, have been noteworthy accomplishments. IRS experienced declines in enforcement staffing after 1998, but recently stopped the declines and begun to show increases. Despite this, enforcement remains a high risk area because of the continued need to improve enforcement and make progress towards reducing the tax gap. IRS has made significant progress in establishing management controls and acquiring infrastructure as part of the BSM program, as well as significant progress in addressing financial management issues. However, BSM remains at risk because of the scope and complexity of modernization activities and the need for better management capacity to avoid repeating the program's history of schedule delays and cost overruns. Looking ahead, continuing the progress described above depends on IRS addressing resource constraints and realizing efficiency and systems improvements. We highlight several such opportunities: (1) developing long-term goals would help IRS and Congress assess agency performance and make budget decisions, (2) considering additional funding enhancements such as user fees and private debt collection which may help mitigate budget constraints, (3) leveraging nonfederal partners such as states to assist with tax law enforcement and volunteers to help provide taxpayer service, (4) prioritizing taxpayer service activities could help IRS minimize the impact of budget cuts, (5) targeting enforcement resources could help IRS make more efficient use of available resources and help the agency make progress towards reducing the tax gap, (6) creating the necessary systems to enable IRS to develop accurate cost accounting information would help IRS make resource allocation decisions, (7) developing and using better productivity data would help IRS make productivity improvements and thereby make better use of available resources, (8) making needed management improvements would help IRS bring planned new information systems on-line in a timely and cost-effective manner, and (9) making needed improvements to assure information systems security would reduce vulnerabilities.

section_title: Letter
paragraphs: Mr. Chairman, we are pleased to participate in this joint review of the  Internal Revenue Service (IRS). Since passage of the IRS Restructuring  and Reform Act of 1998 (RRA 98), IRS has faced the challenge of managing  its resources to simultaneously improve service to taxpayers, assure  taxpayers’ compliance with the tax laws, and modernize its antiquated  information systems. As you are well aware, making these improvements  is important. IRS is responsible for collecting the roughly $2 trillion in tax  revenue used to fund the government and annually touches more  Americans than any other federal agency. IRS’s service and enforcement  efforts influence Americans’ confidence in the fairness of the tax system  and their perception of the effectiveness of their government.
As requested, this statement provides our assessment of IRS’s current  performance in all three areas. We then look ahead, describing the  challenges that IRS faces in addressing resource constraints as well as  realizing efficiency and information systems improvements.
Our discussion of both recent progress and challenges facing IRS is based  primarily on recently issued GAO products. We used our recent reports  and testimony on IRS’s budget, the tax gap, filing season reviews, financial  audits, systems modernization activities, Business Systems Modernization  (BSM) expenditure plans, and information security. Our work was  performed in accordance with generally accepted government auditing  standards.
In summary, IRS has made progress in improving service and modernizing  operations, but the gains have not been uniform. The most noticeable  progress has been in IRS’s taxpayer service, an area that has been of  special concern to the Congress. Access to IRS by telephone, the accuracy  of answers given to taxpayer inquiries, and the growth of IRS’s Web site,  which now provides a variety of services, including forms and  instructions, information on the status of refunds, and answers to  frequently asked questions, have been noteworthy accomplishments in the  years since passage of RRA 98. With respect to tax law enforcement, IRS  experienced declines in enforcement staffing after 1998 but has recently  stopped the declines and begun to show increases. However, tax law  enforcement remains a high-risk area because of the need to improve  enforcement and make progress towards reducing the tax gap—the  difference between taxes owed and taxes paid on time. As for systems  modernization, IRS has made significant progress in establishing long- overdue management controls and in acquiring foundational system  infrastructure and applications as part of the BSM project, as well as  significant progress in addressing financial management issues. However,  BSM remains at risk because of the scope and complexity of  modernization activities and the need for better management capacity to  avoid repeating the program’s history of schedule delays and cost  overruns.
Looking ahead, continued progress depends on IRS addressing resource  constraints and realizing efficiency and systems improvements. Long-term  goals would help stakeholders, including the Congress, evaluate the  adequacy of IRS’s budget. Further, additional resources might be brought  to bear by, perhaps, additional user fees or the leveraging of nonfederal  partners beyond what is now done with states and volunteers. Efficiency  gains may be possible by, for example, prioritizing taxpayer services in  order to focus on those that provide greater benefit, targeting enforcement  by using better data on noncompliance, collecting more accurate cost  information to improve day-to-day and long-term decision making, and  realizing productivity improvements. Finally, IRS needs to bring planned  new systems on line in a timely and cost-effective manner while also  assuring systems security. GAO has outstanding recommendations related  to taxpayer service, tax law enforcement, BSM, and systems security. IRS  is in general agreement with our recommendations and is in the process of  implementing many of them.
subsections: section_title: IRS Has Improved Taxpayer Service but Enforcement and BSM Remain High Risk
paragraphs: IRS has made noticeable progress in improving taxpayer service since  passage of RRA 98. While progress has also been made in the tax law  enforcement and BSM areas, however, serious ongoing issues have kept  both on our high-risk list.
subsections: section_title: IRS Has Improved Taxpayer Service but Is Shifting Priorities
paragraphs: IRS has made meaningful progress in four key taxpayer service areas;  paper and electronic processing, telephone assistance, IRS’s Web site, and  walk-in assistance. Table 1 shows IRS performance in these areas since  2002. While the progress is widespread, table 1 also shows that there are  some areas of performance that merit attention, especially in light of  current and proposed cuts to IRS’s taxpayer service budget. In fiscal year  2005 and in its proposed 2006 budget, IRS is shifting priorities by reducing  taxpayer service and increasing resources for enforcement.
As shown in table 1, electronic filing has increased while paper filing has  dropped. The increase in electronic filing has allowed IRS to reduce the  resources devoted to processing. As shown in figure 1, IRS reduced the  staff devoted to processing paper returns between 1999 and 2004 by just  over 1,100 staff years. The figure also shows that as the number of e-filed  returns has increased, the number of staff years used to process those  returns has not increased. The decline in paper processing staff allowed  IRS to close its Brookhaven processing center in 2003. In addition, IRS is  in the process of closing its paper processing operation in Memphis.
In addition to saving IRS resources, electronic filing offers benefits to  taxpayers in that it allows taxpayers to receive refunds faster and is less  error prone. IRS employees manually transcribe paper tax return  information into IRS’s computer systems, which can introduce errors.
subsections: section_title: Telephone Assistance
paragraphs: As shown in table 1, by several measures IRS’s telephone service has  improved since 2002. One measure of access, the customer service  representative (CSR) level of service (the percentage of taxpayers who  attempted to reach CSRs and actually got through and received service)  increased from 62 percent to 83 percent. Accuracy also showed some  improvement; accounts accuracy (accuracy of answers to taxpayer  questions about their accounts) exceeded 90 percent in 2005. However,  taxpayers are waiting somewhat longer in 2005 to get answers than in  2002, 2003, and 2004.
section_title: Web Site
paragraphs: IRS’s Web site is performing well. A relatively recent addition to IRS’s  menu of services, the Web site first became available during the 1996 filing  season. We found it to be user friendly because it was readily accessible  and easy to navigate. An independent weekly study ranked it in the top 4  out of 40 federal government web sites in terms of accessibility.
The site is used extensively. In the early weeks of the 2005 filing season  the IRS Web site was visited about 83 million times by users who viewed  about 628 million pages and downloaded about 70.3 million forms and  publications. IRS’s Web site continues to provide two very important tax  service features: (1) “Where’s My Refund,” which enables taxpayers to  check on the status of their refund and (2) Free File, which provides  taxpayers the ability to file their tax return electronically for free. This  filing season IRS provided new functionality for “Where’s My Refund”  whereby taxpayers whose refunds could not be delivered by the Postal  Service (i.e., returned as undeliverable mail), could change their addresses  on the Web site.
section_title: IRS and Volunteer Walk-in Sites
paragraphs: Taxpayer use of IRS’s walk-in sites has decreased while use of volunteer  sites has increased. As shown in figure 2, IRS projects it will see about  3.4 million visits to its 400 walk-in sites this year, down from over  3.5 million in 2004 and about 4.3 million in 2001. Over the same period, IRS  expects taxpayer visits to volunteer sites to increase to just over 2 million  visits in 2005; a substantial increase over about 1.6 million visits in 2004  and fewer than 1 million in 2001. IRS continues to encourage taxpayers to  use volunteer sites for return preparation.
This shift is important because it transfers time-consuming services,  particularly return preparation, to volunteers and allows IRS to  concentrate on services that only it can provide, such as account  assistance or compliance work. While it reduces the demand on IRS  resources, the shift from IRS to volunteer sites has raised concerns about  the quality of service provided. We and the Treasury Inspector General for  Tax Administration (TIGTA) have called attention to the quality of service  at both IRS walk-in and volunteer sites. IRS has separate quality initiatives  under way at both IRS walk-in and volunteer sites, although data remain  limited and cannot be compared to prior years.
section_title: Post-Filing Taxpayer Service
paragraphs: Another concern is post-filing service to taxpayers when IRS has  undertaken compliance or collection actions. An example of this is the  release of federal tax liens against taxpayers’ property. IRS is required to  release a federal tax lien within 30 days after the date the tax liability is  satisfied or has become legally unenforceable or the Secretary of the  Treasury has accepted a bond for the assessed tax but, as have we  reported for several years as part of our financial audits, most recently in  November 2004, IRS has not always met this standard.
section_title: IRS Has Stopped Declines In Enforcement Staffing, but Enforcement Remains High Risk
paragraphs: We have long been concerned about tax noncompliance and IRS efforts to  address it. Collection of unpaid taxes was included in our first high-risk  series report in 1990, with a focus on the backlog of uncollected debts  owed by taxpayers. In 1995, we added Filing Fraud as a separate high-risk  area, narrowing the focus of that high-risk area in 2001 to Earned Income  Credit Noncompliance because of the particularly high incidence of fraud  and other forms of noncompliance in that program. We expanded our  concern about the Collection of Unpaid Taxes in our 2001 high-risk report  to include not only unpaid taxes (including tax evasion and unintentional  noncompliance) known to IRS, but also the broader enforcement issue of  unpaid taxes that IRS has not detected. In our high-risk update that we  issued in January, we consolidated these areas into a single high-risk  area—Enforcement of Tax Laws—because we believe the focus of  concern on the enforcement of tax laws is not confined to any one  segment of the taxpaying population or any single tax provision.
Tax law enforcement is a high-risk area in part because of the size of the  tax gap. IRS’s recent estimate of the difference between what taxpayers  timely and accurately paid in taxes and what they owed ranged from  $312 billion to $353 billion for tax year 2001. IRS estimates it will  eventually recover some of this tax gap, resulting in a net tax gap from  $257 billion to $298 billion. The tax gap arises when taxpayers fail to  comply with the tax laws by underreporting tax liabilities on tax returns;  underpaying taxes due from filed returns; or “nonfiling,” which refers to  the failure to file a required tax return altogether or in a timely manner.
Tax law enforcement is also high risk because past declines in IRS’s  enforcement activities threatened to erode taxpayer compliance. In recent  years, the resources IRS has been able to dedicate to enforcing the tax  laws have declined. For example, the number of revenue agents (those  who examine complex returns), revenue officers (those who perform field  collection work), and special agents (those who perform criminal  investigations) decreased over 21 percent from 1998 through 2003.  However, IRS achieved some staffing gains in 2004 and expects modest  gains in 2005. IRS’s proposal for fiscal year 2006, if funded and  implemented as planned, would return enforcement staffing in these  occupations to their highest levels since 1999.
Concurrently, IRS’s enforcement workload—measured by the number of  taxpayer returns filed—has continually increased. For example, from 1997  through 2003, the number of individual income tax returns filed increased  by about 8 percent. Over the same period, returns for high-income  individuals grew by about 81 percent. Due to their income levels, IRS  believes that these individuals present a particular compliance risk. In  light of declines in enforcement staffing and the increasing number of  returns filed, nearly every indicator of IRS’s coverage of its enforcement  workload has declined in recent years. Although in some cases workload  coverage has begun to increase, overall IRS’s coverage of known workload  is considerably lower than it was just a few years ago. Figure 3 shows the  trend in examination rates—the proportion of tax returns that IRS  examines each year—for field, correspondence, and total examinations  since 1995. Field examinations involve face-to-face examinations and  correspondence examinations are typically less comprehensive and  complex, involving communication through written notices. IRS  experienced steep declines in examination rates from 1995 to 1999, but the  examination rate has slowly increased since 2000. However, as the figure  shows, the increase in total examination rates of individual filers has been  driven mostly by correspondence examinations, while more complex field  examinations continue to decline.
Further, IRS’s workload has grown ever more complex as the tax code has  grown more complex. IRS is challenged to administer and explain each  new provision, thus absorbing resources that otherwise might be used to  enforce the tax laws. Concurrently, other areas of particularly serious  noncompliance have gained the attention of IRS and the Congress, such as  abusive tax shelters and schemes employed by businesses and wealthy  individuals that often involve complex transactions that may span national  boundaries. Given the broad declines in IRS’s enforcement workforce,  IRS’s decreased ability to follow up on suspected noncompliance, and the  emergence of sophisticated evasion concerns, IRS is challenged in  attempting to ensure that taxpayers fulfill their obligations.
On the collection front, IRS’s use of enforcement sanctions, such as liens,  levies, and seizures, dropped precipitously during the mid and late 1990s.  In fiscal year 2000, IRS’s use of these three sanctions was at 38 percent,  7 percent, and 1 percent, respectively, of fiscal year 1996 levels. However,  beginning in fiscal year 2001, IRS’s use of liens and levies began to  increase. By fiscal year 2004, IRS’s use of liens, levies, and seizures  reached 71 percent, 65 percent, and 4 percent of 1996 levels, respectively.
IRS is working to further improve its enforcement efforts. In addition to  recent favorable trends in enforcement staffing, correspondence  examinations, and the use of some enforcement sanctions, IRS has  recently made progress with respect to abusive tax shelters through a  number of initiatives and recent settlement offers that have resulted  in billions of dollars in collected taxes, interest, and penalties. In addition,  IRS is developing a centralized cost accounting system, in part to obtain  better cost and benefit information on compliance activities, and is  modernizing the technology that underpins many core business processes.  It has also redesigned some compliance and collections processes and  plans additional redesigns as technology improves. Finally, the recently  completed National Research Program (NRP) study of individual  taxpayers not only gives us a benchmark of the status of taxpayers’  compliance but also gives IRS a better basis to target its enforcement  efforts.
section_title: IRS Has Made Progress in Implementing BSM, but Program Has History of Cost Overruns and Schedule Delays and Is High Risk
paragraphs: IRS has long relied on obsolete automated systems for key operational and  financial management functions, and its attempts to modernize these aging  computer systems span several decades. Modernization has encountered a  long history of continuing delays and design difficulties and the impact of  these problems on IRS’s operations led GAO to designate IRS’s systems  modernization as a high-risk area in 1995 and it remains so today.
IRS’s current modernization program, BSM, is a highly complex,  multibillion-dollar program that is the agency’s latest attempt to modernize  its systems. BSM is critical to supporting IRS’s taxpayer service and  enforcement goals. For example, BSM includes projects to allow taxpayers  to file and retrieve information electronically and to provide technology  solutions to help reduce the backlog of collections cases. BSM is also  important to allow IRS to provide the reliable and timely financial  management information needed to account for the nation’s largest  revenue stream and better enable the agency both to determine and to  justify its resource allocation decisions and congressional budgetary  requests.
Over the past year, IRS has deployed initial phases of several modernized  systems under its BSM program. The following provides examples of the  systems and functionality that IRS implemented in 2004 and the beginning  of 2005.
Modernized e-File (MeF). This project is intended to provide electronic  filing for large corporations, small businesses, and tax-exempt  organizations. The initial releases of this project were implemented in  June and December 2004, and allowed for the electronic filing of forms  and schedules for the form 1120 (corporate tax return) and form 990  (tax-exempt organizations’ tax return). IRS reported that, during the 2004  filing season, it accepted over 53,000 of these forms and schedules using  MeF.    e-Services. This project created a Web portal and provided other  electronic services to promote the goal of conducting most IRS  transactions with taxpayers and tax practitioners electronically. IRS  implemented e-Services in May 2004. According to IRS, as of late  March 2005, over 84,000 users have registered with this Web portal.
Customer Account Data Engine (CADE). CADE is intended to replace  IRS’s antiquated system that contains the agency’s repository of taxpayer  information and, therefore, is the BSM program’s linchpin and highest  priority project. In July 2004 and January 2005, IRS implemented the initial  releases of CADE, which have been used to process filing year 2004 and  2005 1040EZ returns, respectively, for single taxpayers with refund or  even-balance returns. According to IRS, as of March 16, 2005, CADE had  processed over 842,000 tax returns so far this filing season.  Integrated Financial System (IFS). This system replaced aspects of IRS’s  core financial systems and is ultimately intended to operate as its new  accounting system of record. The first release of this system became fully  operational in January 2005.
In prior years, IRS deployed several systems, including (1) Customer  Communications 2001, to improve telephone call management, call  routing, and customer self-service applications; (2) Customer Relationship  Management Examination, to provide off-the-shelf software to IRS  revenue agents to allow them to accurately compute complex corporate  transactions; and (3) Internet Refund/Fact of Filing, to improve taxpayer  self-service by providing to taxpayers via the Internet instant refund status  information and instructions for resolving refund problems.
Although IRS is to be applauded for delivering important BSM  functionality, the BSM program is far from complete. Future deliveries of  additional functionality of deployed systems and the implementation of  other BSM projects are expected to have a significant impact on IRS’s  taxpayer services and enforcement capability as well as its efforts to  continue to improve its financial management. For example, IRS has  projected that CADE will process about 2 million returns in the 2005 filing  season. However, the returns being processed in CADE are the most basic  and constitute less than 1 percent of the total tax returns expected to be  processed during the current filing season. IRS expects the full  implementation of CADE to take several more years. Another BSM  project—the Filing and Payment Compliance (F&PC) project—is expected  to increase (1) IRS’s capacity to treat and resolve the backlog of  delinquent taxpayer cases, (2) the closure of collection cases by 10 million  annually by 2014, and (3) voluntary taxpayer compliance. As part of this  project, IRS plans to deliver an initial limited private debt collection  capability in January 2006, with full implementation of this aspect of the  F&PC project to be delivered by January 2008 and additional functionality  to follow in later years. Finally, full implementation of CADE, as well as  the successful implementation of future releases of IFS and efforts to  address the impact of IRS’s decision to discontinue the Custodial  Accounting Project (CAP) will be critical to addressing many of IRS’s  remaining and long-standing financial management issues.
section_title: Continued Progress Depends on IRS Addressing Resource Constraints and Realizing Efficiency and Systems Improvements
paragraphs: For IRS to build on the gains made since passage of RRA 98, the agency  must address numerous challenges related to resource management. IRS  faces budgetary constraints that may be addressed in part through the  development of goals for assessing performance and to help in making  budget decisions, looking for opportunities to enhance its funding, and  leveraging the resources of nonfederal partners. IRS also faces the  challenges of improving efficiency in taxpayer service and tax law  enforcement, developing useful cost accounting tools, and improving  productivity. Finally, IRS faces information systems challenges in both  BSM and systems security shortfalls.
subsections: section_title: Long-term Goals Would Help IRS Assess Performance and Make Budget Decisions
paragraphs: For IRS, the Congress, and IRS’s other stakeholders, long-term goals can  be used to assess performance and progress towards these goals, and  determine whether budget decisions contribute to achieving those goals.  Without long-term goals, the Congress and other stakeholders are  hampered in evaluating whether IRS is making satisfactory long-term  progress. Further, without such goals, the extent to which IRS’s 2006  budget request would help IRS achieve its mission over the long term is  less clear.
A recent Program Assessment Rating Tool (PART) review conducted by  the Office of Management and Budget (OMB) reported that IRS lacks long- term goals. As a result, IRS has been working to identify and establish  long-term goals for all aspects of its operations for over a year.  IRS  officials said these goals will be finalized and provided publicly as an  update to the agency’s strategic plan in the near future.
Long-term goals and results measurement are a component of the  statutory strategic planning and management framework that the Congress  adopted in the Government Performance and Results Act of 1993. As a  part of this comprehensive framework, long-term goals that are linked to  annual performance measures can help guide agencies when considering  organizational changes and making resource decisions. For example, long- term goals would provide IRS with a framework for assessing budgetary  tradeoffs between taxpayer service and enforcement and whether IRS is  making satisfactory progress towards achieving those goals. Similarly,  long-term goals could help identify priorities within the taxpayer service  functions (e.g., if the budget for taxpayer service were to be cut and  efficiency gains did not offset the cut, long-term goals could help guide  decisions about whether to make service cuts across a broad or target  selected services).
Perhaps most important, long-term compliance goals coupled with  periodic measurement of compliance levels would provide IRS with a  better basis for determining to what extent its various day-to-day service  and enforcement efforts contribute to compliance in the long run.  Furthermore, long-term, quantitative goals may help IRS consider new  strategies to improve compliance, especially since these strategies could  take several years to implement. For example, IRS’s progress toward the  goal of having 80 percent of all individual tax returns electronically filed  by 2007 has required enhancement of its technology, development of  software to support electronic filing, education of taxpayers and  practitioners, and other steps that could not be completed in a short time  frame. Focusing on intended results can also promote strategic and  disciplined management decisions that are more likely to be effective  because managers who use fact-based performance analysis are better  able to target areas most in need of improvement and select appropriate  interventions.
section_title: Considering Funding Enhancements Could Help Mitigate Budget Constraints
paragraphs: Identifying potential new sources of funds could be an opportunity for  helping to mitigate IRS’s budget constraints. Current examples of resource  enhancers—user fees and private debt collection—may provide useful  models for IRS and Congress to consider. User fees are collected from  identifiable recipients of special benefits beyond those accruing to the  general public. In 2004, IRS collected over $137 million in user fees for a  wide range of services, including installment agreements, offers in  compromise, and Freedom of Information Act (FOIA) requests. In fiscal  year 2004, about 82 percent of all user fees collected by IRS were for  installment agreements or Employee Plans and Exempt Organizations  letter rulings and determination letters. The 1995 Treasury Appropriation  Act specifies that IRS can keep a maximum of $119 million per year of the  user fees it collects, with the rest of the user fees going into the Treasury  general fund. In 2004, IRS retained about $90 million from the user fees  collected (see table 2). In comparison, IRS’s total spending in 2004 was  $10.7 billion.
In setting certain user fees, IRS must follow Internal Revenue Code (IRC)  Section 7528, which authorizes user fees for letter rulings, opinion letters,  determination letters, and similar requests. IRC Section 7528 requires that  user fees (1) vary according to categories or subcategories, (2) take into  account the average time and difficulty of requests by categories or  subcategories, (3) be payable in advance, and (4) be subject to appropriate  exemptions and reduced fees within limits specified by Section 7528. IRS  is precluded from expending any fees collected pursuant to IRC Section  7528 unless provided by an appropriations act. As mentioned earlier, the  1995 Treasury Appropriation Act specifies that IRS can keep a maximum  of $119 million per year in user fee collections.
OMB Circular A-25, User Charges, establishes general federal policy for  user fees assessed for government services by executive branch agencies.  A-25 requirements include (1) identifying services and activities that  convey special benefits; (2) determining their full cost or market price, as  appropriate; (3) biennial reviews of user fees for unanticipated cost or  market price changes; and (4) biennial reviews of agency programs not  subject to user fees to determine if such fees should be assessed.
Private debt collection provides another example of a revenue  enhancement model that may be useful for IRS. The 2004 American Jobs  Creation Act permitted IRS to contract with private collection agencies  (PCA) to collect some federal tax debts and allows IRS to keep a portion  of the funds collected by PCAs. PCAs will not replace IRS’s own  collection resources, but will handle cases that do not require enforcement  action or discretion in resolving tax liabilities. According to IRS, the  private debt collection program will help reduce the significant and  growing amount of uncollectable cases that are not currently collected,  and enable IRS to focus existing resources to address more difficult cases.  IRS will begin a limited implementation phase of the private debt  collection in 2005, and full implementation is planned for 2007. The law  allows IRS to retain and use up to 25 percent of any amounts collected to  pay for collection services and IRS collection enforcement activities. IRS  expects to retain $10 million of PCA collections in fiscal year 2007 and  more in later years.
section_title: Leveraging Nonfederal Partners Is Another Way to Accomplish More
paragraphs: IRS has leveraged nonfederal resources to make improvements to  taxpayer service and tax law enforcement. The examples below highlight  the variety of such leveraging and could provide a basis for exploring  whether additional such opportunities exist.
One example involving taxpayer service is the Free File Alliance. In 2003  IRS entered into a 3-year agreement with the Free File Alliance, a  consortium of tax preparation companies that provides free electronic  filing to taxpayers who access any of the companies via a link on IRS’s  Web site. IRS has benefited from this partnership because it encourages  electronic filing of tax returns. For example, as of March 16, 2005,  3.6 million tax returns had been filed via Free File, which represents a  44 percent increase over the same time period last year.
IRS has also established partnerships with states and several cities to  assist in combating abusive tax schemes. In September 2003, IRS  announced the establishment of a nationwide partnership to combat  abusive tax avoidance. Under agreements with individual states, IRS  shares information on abusive tax avoidance transactions and those  taxpayers who participate in them. The agreements creating this  partnership were designed to enable States and IRS to move more  aggressively in addressing this tax compliance problem. The partnership  also includes joint public outreach activities to more effectively counter  the claims of those marketing tax schemes.
Another example of IRS’s effort to leverage nonfederal resources is the  over 13,500 volunteer sites run by community-based coalitions. IRS awards  grants, trains and certifies volunteers, and provides reference materials,  computer software and, in some cases, computers to these volunteer  organizations to assist primarily low-income and elderly taxpayers prepare  their returns. Since 2001, the number of taxpayers seeking return  preparation assistance at volunteer sites has increased an average of  19 percent per year. During the 2004 filing season, taxpayers had over five  times more returns prepared at volunteer sites than at IRS walk-in sites.  This trend reflects IRS’s strategy to shift return preparation to sites staffed  by volunteer and community-based coalitions that are overseen by IRS.  IRS has encouraged the shift by advertising the locations of these sites.
As we noted earlier, the shift of taxpayers from walk-in to volunteer sites  is important because it has transferred time-consuming services,  particularly return preparation, from IRS to volunteer sites and allowed  IRS to concentrate on services that only it can provide, such as account  assistance or compliance work. However, as we also noted earlier, there  have been concerns raised about the quality of service at both walk-in and  volunteer sites. In addition, in her January 2005 report, the Taxpayer  Advocate expressed concern about the reduction of face-to-face services,  such as those offered at walk-in sites. She stated that IRS’s plan does not  adequately provide for the segment of the population that continues to rely  on the interaction provided by walk-in sites. Better data about the quality  of service at volunteer sites would provide a baseline for making decisions  about how to better manage quality.
section_title: Prioritizing Taxpayer Service Could Minimize Impacts of Budget Cuts
paragraphs: For at least two reasons, this is an opportune time to review the menu of  taxpayer services that IRS provides. First, IRS’s budget for taxpayer  services was reduced in 2005 and an additional reduction is proposed for  2006. These reductions have forced IRS to propose scaling back some  services, including the hours of telephone contact availability. Second, as  we have reported, IRS has made significant progress in improving the  quality of its taxpayer services. For example, IRS now provides many  Internet services that did not exist a few years ago, and has noticeably  improved the quality of telephone services. This opens up the possibility of  maintaining the overall level of taxpayer service but with a different menu  of service choices. Cuts in selected services could be offset by the new and  improved services.
Generally, as indicated in the budget, the menu of taxpayer services that  IRS provides covers assistance, outreach, and processing. Assistance  includes answering taxpayer questions via telephone, correspondence, and  face to face at its walk-in sites. Outreach includes educational programs  and the development of partnerships. Processing includes issuing millions  of tax refunds.
When considering program reductions, we support a targeted approach  rather than across-the-board cuts. A targeted approach helps reduce the  risk that effective programs are reduced or eliminated while ineffective or  lower priority programs are maintained.
With the above reasons in mind for reconsidering IRS’s menu of services,  we have compiled a list of options for targeted reductions in taxpayer  service. The options on this list are not recommendations, but are  intended to contribute to a dialogue about the tradeoffs faced when setting  IRS’s budget. The options presented meet at least one of the following  criteria that we generally use to evaluate programs or budget requests.  These criteria include that the activity:    duplicates other efforts that may be more effective and/or efficient;    historically does not meet performance goals or provide intended results  as reported by GAO, TIGTA, IRS, or others;    experiences a continued decrease in demand;  lacks adequate oversight, implementation and management plans, or  structures and systems to be implemented effectively;    has been the subject of actual or requested funding increases that cannot  be adequately justified; or    has the potential to make an agency more self-sustaining by charging user  fees for services provided.
We recognize that the options listed below involve tradeoffs. In each case,  some taxpayers would lose a service they use. However, the savings could  be used to help maintain the quality of other services. We also want to give  IRS credit for identifying savings, including some on this list. The options  include the following:    Closing walk-in sites. As discussed previously, taxpayer demand for walk- in services has continued to decrease and staff answer a more limited  number of tax law questions in person than staff answer via telephone.
Limiting the type of telephone questions answered by IRS assistors. IRS  assistors still answer some refund status questions even though IRS  provides automated answers via telephone and its Web site.
Mandating electronic filing for some filers such as paid preparers or  businesses. As noted, efficiency gains from electronic filing have enabled  IRS to consolidate paper processing operations.
Charging for services. For example, IRS provides paid preparers with  information on federal debts owed by taxpayers seeking refund  anticipation loans.
section_title: Targeting Enforcement Could Make More Efficient Use of Resources
paragraphs: Multiple enforcement strategies could help IRS reduce the tax gap. Given  its size, even small or moderate reductions in the net tax gap could yield  substantial returns. For example, based on IRS’s most recent estimate, a  1 percent reduction in the net tax gap would likely yield more than  $2.5 billion annually.
Although reducing the tax gap may be an attractive means to improve the  nation’s fiscal position, achieving this end will be a challenging task given  persistent levels of noncompliance. IRS has made efforts to reduce the tax  gap since the early 1980s; yet the tax gap is still large—although without  these efforts it could be even larger. Also, IRS is challenged in reducing the  tax gap because the tax gap is spread across the five different types of  taxes that IRS administers, and a substantial portion of the tax gap is  attributed to taxpayers who are not subject to withholding or information  reporting requirements. Moreover, as we have reported in the past,  closing the entire tax gap may not be feasible or desirable, as it could  entail more intrusive recordkeeping or reporting than the public is willing  to accept or more resources than IRS is able to commit.
Although much of the tax gap that IRS currently recovers is through  enforcement actions, a sole focus on enforcement will not likely be  sufficient to further reduce the net tax gap. Rather, the tax gap must be  attacked on multiple fronts and with multiple strategies on a sustained  basis. For example, efforts to simplify the tax code and otherwise alter  current tax policies may help reduce the tax gap by making it easier for  individuals and business to understand and voluntarily comply with their  tax obligations. For instance, reducing the multiple tax preferences for  retirement savings or education assistance might ease taxpayers’ burden  in understanding and complying with the rules associated with these  options. Also, simplification may reduce opportunities for tax evasion  through vehicles such as abusive tax shelters. For any given set of tax  policies, IRS’s efforts to reduce the tax gap and ensure appropriate levels  of compliance will need to be based on a balanced approach of providing  service to taxpayers and enforcing the tax laws.
Furthermore, providing quality services to taxpayers is an important part  of any overall strategy to improve compliance and thereby reduce the tax  gap. As we have reported in the past, one method of improving  compliance through service is to educate taxpayers about confusing or  commonly misunderstood tax requirements. For example, if the forms and  instructions taxpayers use to prepare their taxes are not clear, taxpayers  may be confused and make unintentional errors. One method to ensure  that forms and instructions are sufficiently clear is to test them before use.  However, we reported in 2003 that IRS had tested revisions to only five  individual forms and instructions from July 1997 through June 2002,  although hundreds of forms and instructions had been revised in  2001 alone.
Finally, in terms of enforcement, IRS will need to use multiple strategies  and techniques to find noncompliant taxpayers and bring them into  compliance. One pair of tools has been shown to lead to high levels of  compliance: withholding tax from payments to taxpayers and having third  parties report information to IRS and the taxpayers on income paid to  taxpayers. For example, banks and other financial institutions provide  information returns (Forms 1099) to account holders and IRS showing the  taxpayers’ annual income from some types of investments. Similarly, most  wages, salaries, and tip compensation are reported by employers to  employees and IRS through Form W-2. Preliminary findings from NRP  indicate that more than 98.5 percent of these types of income are  accurately reported on individual returns.
Regularly measuring compliance can offer many benefits, including  helping IRS identify new or major types of noncompliance, identify  changes in tax laws and regulations that may improve compliance, more  effectively target examinations of tax returns or other enforcement  programs, understand the effectiveness of its programs to promote and  enforce compliance, and determine its resource needs and allocations. For  example, by analyzing 1979 and 1982 compliance research data, IRS  identified significant noncompliance with the number of dependents  claimed on tax returns and justified a legislative change to address the  noncompliance. As a result, for tax year 1987, taxpayers claimed about  5 million fewer dependents on their returns than would have been  expected without the change in law. In addition, tax compliance data are  useful outside of IRS for tax policy analysis, revenue estimating,  and research.
IRS research officials have proposed a compliance measurement  study that will allow IRS to update underreporting estimates involving  flow-through entities. This study, which IRS intends to begin in fiscal  year 2006, would take 2 to 3 years to complete. Because either individual  taxpayers or corporations may be recipients of income (or losses) from  flow-through entities, this study could affect IRS’s estimates for the  underreporting gap for individual and corporate income taxes.
While these data and methodology updates could improve the tax gap  estimates, IRS has no documented plans to periodically collect more or  better compliance data over the long term. Other than the proposed study  of flow-through entities, IRS does not have plans to collect compliance  data for other segments of the tax gap. Also, IRS has indicated that given  its current research priorities, it would not begin another NRP study of  individual income tax returns before 2008, if at all, and would not  complete such a study until at least 2010. When IRS initially proposed the  NRP study, it had planned to study individual income tax underreporting  on a 3-year cycle.
According to IRS officials, IRS has not committed to regularly collecting  compliance data because of the associated costs and burdens. Taxpayers  whose returns are examined through compliance studies such as NRP  bear costs in terms of time and money. Also, IRS incurs costs, including  direct costs and opportunity costs—revenue that IRS potentially forgoes  by using its resources to examine randomly selected returns, which may  include returns from compliant taxpayers, as opposed to traditional  examinations that focus on taxpayer returns that likely contain  noncompliance and may more consistently produce additional tax  assessments.
Although the costs and burdens of compliance measurement are legitimate  concerns, as we have reported in the past, we believe compliance studies  to be good investments. Without current compliance data, IRS is less able  to determine key areas of noncompliance to address and actions to take to  maximize the use of its limited resources. The lack of firm plans to  continually obtain fresh compliance data is troubling because the  frequency of data collection can have a large impact on the quality and  utility of compliance data. As we have reported in the past, the longer the  time between compliance measurement surveys, the less useful they  become given changes in the economy and tax law.
In designing its recently completed NRP study, IRS balanced the costs,  burdens, and compliance risk of studying that area of the tax gap. Any  plans for obtaining and maintaining reasonably current information on  compliance levels for all portions of the tax gap would similarly need to  take into account costs, burdens, and compliance risks in determining  which areas of compliance to measure and the scope and frequency of  such measurement.
The NRP survey had an added benefit of including the use of casebuilding  to aid examiners in determining whether IRS needs to have any contact  with taxpayers to verify the accuracy of information reported on their tax  returns. The casebuilding tools consisted of data from both IRS and third- party sources. IRS’s NRP casebuilding included return information from  the prior 3 years, audit history, payment and filing history, information  return data reported by third parties (banks, lending institutions, and  others), and bank reports on large cash transactions. NRP casebuilding  tools also included data from third-party sources, such as external public  database containing real estate and other asset ownership information  (e.g., motor vehicle registrations and ownership of luxury items like  watercraft and aircraft). Another third-party data source was the  Dependent Data Base, which is a combination of Department of Health  and Human Services and Social Security Administration data. These data  were used to provide custody information that can be used to help  determine the validity of dependent and Earned Income Tax Credit (EITC)  claims. Use of these data helped IRS enforcement staff to rule out  compliance issues that could be verified without contacting taxpayers.
As IRS moves to further strengthen enforcement and introduce  enforcement initiatives, one management challenge will be coordinating  across IRS programs and offices. An initiative that identifies  noncompliance has resource implications for downstream activities such  as collections, criminal investigations, and appeals. Without appropriate,  coordinated follow-up, compliance initiatives run the risk of becoming  toothless. IRS has experienced this sort of imbalance in the past. For  example, in 2002 we reported on the growing backlog of collections cases  generated by the upstream exam and assessment functions that the  downstream collections function lacked the capacity to pursue.
section_title: Accurate Cost Information Would Help IRS Make Resource Allocation Decisions
paragraphs: Managing a federal agency as large and complex as IRS requires managers  to constantly weigh the relative costs and benefits of different approaches  to achieving the goals mandated by the Congress. Management is  constantly called upon to make important long-term strategic as well as  daily operational decisions about how to make the most effective use of  the limited resources at its disposal. As constraints on available resources  increase, these decisions become correspondingly more challenging and  important. In order to rise to this challenge, management needs to have at  its disposal current and accurate information upon which to base its  decisions, and to enable it to monitor the effectiveness of actions taken  over time so that appropriate adjustments can be made as conditions  change.
However, in its ongoing effort to make such increasingly difficult resource  allocation decisions and defend those decisions before the Congress, IRS  management has long been hampered by a lack of current and accurate  information concerning the costs of the various options being considered.  This has impaired management’s ability to properly decide which, if any,  of the options at hand are worth the cost relative to the expected benefits.  For example, accurate and timely cost information may help IRS consider  changes in the menu of taxpayer services that it provides by identifying  and assessing the relative costs, benefits, and risks of specific projects.  Without reliable cost information, IRS’s ability to make such difficult  choices in an informed, reasoned manner is seriously impaired. Similarly,  IRS should periodically reassess the prices it charges taxpayers in user  fees for various services, such as entering into installment agreements and  making determinations about the tax exemption status of certain  organizations. The cost of providing such services is supposed to be a  major factor in setting the related fees. However, without timely and  reliable cost information, the basis for the fees becomes problematic.  The lack of reliable cost information also means that IRS cannot prepare  cost-based performance measures to assist in measuring the effectiveness  of its programs over time.
IRS lacks reliable and timely cost information because prior to fiscal year  2005, it did not have a cost accounting system to accumulate and report  the reliable cost information that managers needed to support informed  decision making. Instead, management often relied on a combination of  the limited existing cost information; the results of special analysis  initiated to establish the full cost of a specific, narrowly defined task or  item; and estimates based on the best judgment of experienced staff. In  fiscal year 2005, IRS implemented a cost accounting module as part of the  first release of its IFS. However, while this module has much potential and  has begun accumulating cost information, management has not yet  determined what the full range of its cost information needs are or how  best to tailor the capabilities of this module to serve those needs. IRS has  also not yet implemented a related workload management system  intended to provide the cost module with detailed personnel cost  information. In addition, because it generally takes several years of  historical cost information to support meaningful estimates and  projections, IRS cannot yet rely on this system as a significant planning  tool. It will likely require several years and implementation of additional  components of IFS before the full potential of IRS’s cost accounting  module will be realized. In the interim, IRS decision making will continue  to be hampered by inadequate underlying cost information.
section_title: Productivity Improvements Could Help Offset Budget Cuts
paragraphs: IRS needs to make the most use of its available resources and a key to this  is improved productivity. Productivity is defined as the efficiency with  which inputs are used to produce outputs. It is measured as the ratio of  outputs to inputs. Productivity and cost are inversely related—as  productivity increases, average costs decrease. Consequently, information  about productivity can inform budget debates as a factor that explains the  level or changes in the cost of carrying out different types of activities.  Improvements in productivity either allow more of an activity to be carried  out at the same cost or the same level of activity to be carried out at a  lower cost.
Sound productivity data are an important element of meaningful  productivity improvement efforts. As part of our review of IRS process  improvement initiatives, private sector executives we met with stressed  the benefits of productivity analysis. They said that an inadequate  understanding of productivity makes it harder to distinguish processes  with a potential for improvement from those without such potential.  GAO’s Business Process Reengineering Assessment Guide also highlighted  the importance of being able to identify processes that are in greatest need  of improvement.
Opportunities exist to improve enforcement productivity data and give  IRS managers a more informed basis for decisions on how to make  improvements. Statistical methods that are widely used in both the public  and private sectors can be used to adjust productivity measures for quality  and complexity. In particular, by using these methods, managers can  distinguish productivity changes that represent real efficiency gains or  losses from those that are due to changes in quality standards. These  methods could be implemented using data currently available at IRS. The  cost of implementation would be chiefly the staff time required to adapt  the statistical models. Although the computations are complex, the  methods can be implemented using existing software. We currently have  under way a separate study that illustrates how these methods can be used  to create better productivity measures at IRS.
section_title: Additional Management Improvements Needed for BSM Success
paragraphs: The BSM program has a long history of significant cost increases and  schedule delays, which, in part, has led us to report this program as high  risk since 1995. In January 2005 letters to congressional appropriation  committees, IRS stated that it had showed a marked improvement in  significantly reducing its cost variances. In particular, IRS claimed that it  reduced the variance between estimated and actual costs from 33 percent  in fiscal year 2002 to 4 percent in fiscal year 2004. However, we do not  agree with the methodology used in the analysis supporting this claim.  Specifically, (1) the analysis did not reflect actual costs, but instead  reflected changes in cost estimates (i.e., budget allocations) for various  BSM projects; (2) IRS aggregated all of the changes in the estimates  associated with the major activities for some projects, such as CADE,  which masked that monies were shifted from future activities to cover  increased costs of current activities; and (3) the calculations were based  on a percentage of specific fiscal year appropriations, which does not  reflect that these are multiyear projects.
In February 2002 we expressed concern over IRS’s cost and schedule  estimating and made a recommendation for improvement. IRS and its  prime systems integration support (PRIME) contractor have taken action  to improve their estimating practices, such as developing a cost and  schedule estimation guidebook and developing a risk-adjustment model to  include an analysis of uncertainty. These actions may ultimately result in  more realistic cost and schedule estimates, but our analysis of IRS’s  expenditure plans over the last few years shows continued increases in  estimated project life-cycle costs (see fig. 4).
The Assistant Chief Information Officer (CIO) for BSM stated that IRS’s  cost and schedule estimating has improved in the past year. Our  comparison of IRS’s reported project costs and milestone completion  dates presented in the July 2004 and April 2005 expenditure plans shows  that two BSM projects, CADE Releases 1.1 and 1.2, were delivered at the  estimated cost and on or before the scheduled completion dates projected  in the July 2004 expenditure plan. It is important to note that this recent  success is based on project cost and schedule estimates that were re- baselined in the second quarter of fiscal year 2004 with delivery dates in  late fiscal year 2004 and early fiscal year 2005. It is too early to tell whether  this signals a fundamental improvement in IRS’s ability to accurately  forecast project costs and schedules.
The reasons for IRS’s cost increases and schedule delays vary. However,  we have previously reported that they are due, in part, to weaknesses in  management controls and capabilities. We have previously made  recommendations to improve BSM management controls, and IRS has  implemented or begun to implement these recommendations. For  example, in February 2002, we reported that IRS had not yet defined or  implemented an information technology human capital strategy, and  recommended that IRS develop plans for obtaining, developing, and  retaining requisite human capital resources. In August 2004, the current  Associate CIO for BSM identified the completion of a human capital  strategy as a high priority. Among the activities that IRS is in the process  of implementing are prioritizing its BSM staffing needs and developing a  recruiting plan. IRS has also identified, and is in the process of addressing,  other major management challenges. For example, poorly defined  requirements have been among the significant weaknesses that have been  identified as contributing to project cost overruns and schedule delays. As  part of addressing this problem, in March 2005, the IRS BSM office  established a requirements management office, although a leader has not  yet been hired.
subsections: section_title: IRS Is Adjusting the BSM Program in Response to Budget Reductions
paragraphs: The BSM program is undergoing significant changes as it adjusts to  reductions in its budget. Figure 5 illustrates the BSM program’s requested  and enacted budgets for fiscal years 2004 through 2006. For fiscal year  2005, IRS received about 29 percent less funding than it requested (from  $285 million to $203.4 million). According to the Senate report for the  fiscal year 2005 Transportation, Treasury, and General Government  appropriations bill, in making its recommendation to reduce BSM funding,  the Senate appropriations committee was concerned about the program’s  cost overruns and schedule delays. In addition, the committee emphasized  that in providing fewer funds, it wanted IRS to focus on its highest priority  projects, particularly CADE. In addition, IRS’s fiscal year 2006 budget  request reflects an additional reduction of about 2 percent, or about  $4.4 million, from the fiscal year 2005 appropriation.
It is too early to tell what effect the budget reductions will ultimately have  on the BSM program. However, the significant adjustments that IRS is  making to the program to address these reductions are not without risk,  could potentially impact future budget requests, and will delay the  implementation of certain functionality that was intended to provide  benefit to IRS operations and the taxpayer. For example,    Reductions in management reserve/project risk adjustments. In response  to the fiscal year 2005 budget reduction, IRS reduced the amount that it  had allotted to program management reserve and project risk adjustments  by about 62 percent (from about $49.1 million to about $18.6 million).  If BSM projects have future cost overruns that cannot be covered by the  depleted reserve, this reduction could result in (1) increased budget  requests in future years or (2) delays in planned future activities  (e.g., delays in delivering promised functionality) to use those allocated  funds to cover the overruns.
Shifts of BSM management responsibility from the PRIME contractor to  IRS. Due to budget reductions and IRS’s assessment of the PRIME  contractor’s performance, IRS decided to shift significant BSM  responsibilities for program management, systems engineering, and  business integration from the PRIME contractor to IRS staff. For example,  IRS staff are assuming responsibility for cost and schedule estimation and  measurement, risk management, integration test and deployment, and  transition management. There are risks associated with this decision. To  successfully accomplish this transfer, IRS must have the management  capability to perform this role. Although the BSM program office has been  attempting to improve this capability through, for example,  implementation of a new governance structure and hiring staff with  specific technical and management expertise, IRS has had significant  problems in the past managing this and other large development projects,  and acknowledges that it has major challenges to overcome in this area.
Suspension of the Custodial Accounting Project (CAP). Although the  initial release of CAP went into production in September 2004, IRS has  decided not to use this system and to stop work on planned improvements  due to budget constraints. According to IRS, it made this decision after it  evaluated the business benefits and costs to develop and maintain CAP  versus the benefits expected to be provided by other projects, such as  CADE. Among the functionalities that the initial releases of CAP were  expected to provide were (1) critical control and reporting capabilities  mandated by federal financial management laws; (2) a traceable audit trail  to support financial reporting; and (3) a subsidiary ledger to accurately  and promptly identify, classify, track, and report custodial revenue  transactions and unpaid assessments. With the suspension of CAP, it is  now unclear how IRS plans to replace the functionality this system was  expected to provide, which was intended to allow the agency to make  meaningful progress toward addressing long-standing financial  management weaknesses. IRS is currently evaluating alternative  approaches to addressing these weaknesses.
Reductions in planned functionality. According to IRS, the fiscal year  2006 funding reduction will result in delays in planned functionality for  some of its BSM projects. For example, IRS no longer plans to include  form 1041 (the income tax return for estates and trusts) in the fourth  release of Modernized e-File, which is expected to be implemented in  fiscal year 2007.
The BSM program is based on visions and strategies developed in 2000  and 2001. The age of these plans, in conjunction with the significant delays  already experienced by the program and the substantive changes brought  on by budget reductions, indicates that it is time for IRS to revisit its long- term goals, strategy, and plans for BSM. As we have previously reported,  such an assessment would include an evaluation of when significant future  BSM functionality would be delivered. IRS’s Associate CIO for BSM has  recognized that it is time to recast the agency’s BSM strategy because of  changes that have occurred subsequent to the development of the  program’s initial plans. According to this official, IRS is in the process of  redefining and refocusing the BSM program, and he expects this effort to  be completed by the end of this fiscal year. However, clear milestones for  completing these activities have not been defined and we plan to address  this in our ongoing 2005 BSM expenditure plan review for the  appropriations committees.
section_title: IRS Needs to Remedy Serious Information Security Weaknesses over Taxpayer and Bank Secrecy Act Information
paragraphs: Information security is a critical consideration for any organization that  depends on information systems and computer networks to carry out its  mission or business. It is especially important for government agencies  where maintaining the public’s trust is essential. In December 2002, the  Congress enacted the Federal Information Security Management Act of  2002 (FISMA) to strengthen security of information and systems within  federal agencies. FISMA requires each agency to develop, document, and  implement an agencywide information security program to provide  information security for the information and systems that support the  operations and assets of the agency. IRS relies extensively on  interconnected information systems to perform vital functions, such as  collecting and storing taxpayer data, calculating interest and penalties, and  generating refunds. In addition to processing its own financial and tax  information, IRS provides information processing support to the Financial  Crimes Enforcement Network (FinCEN), a Treasury bureau responsible  for administering and enforcing the Bank Secrecy Act (BSA) and its  implementing provisions.
While IRS has made progress in correcting or mitigating previously  reported information security control weaknesses, serious control  weaknesses continue to exist over key financial and tax processing  information systems. For example, during our review of information  security at IRS facilities in 2004, we determined that IRS corrected or  mitigated 32 of the 53 weaknesses that we reported as unresolved at the  time of our last review in 2002. In addition to the 21 previously reported  weaknesses that remained uncorrected, we identified 39 new information  security control weaknesses during this review that placed sensitive  taxpayer and BSA data—including information related to financial crimes,  terrorist financing, money laundering, and other illicit activities—at  significant risk of unauthorized disclosure, modification, and destruction.  These include the following:    Access controls over the mainframe computing environment provided no  logical separation between IRS’s taxpayer data and FinCEN’s BSA data,  allowing all 7460 mainframe users—IRS employees, non-IRS employees,  and contractors—regardless of their official duties, the ability to read and  modify taxpayer and BSA data, including information about citizens, law  enforcement personnel, and individuals subject to investigation. Thus, IRS  users could read or copy BSA information, and law enforcement users  could read or copy taxpayer information.
User accounts and passwords were not adequately controlled to ensure  that only authorized individuals had access to IRS’s servers and networks,  thereby increasing the risk that unauthorized users could gain authorized  user ID and password combinations to claim a user identity and then use  that identity to gain access to sensitive taxpayer or BSA data.
Audit and monitoring of security-related events on IRS’s servers suffered  from insufficient retention of security logs, heightening the risk of  unauthorized system activity going undetected.
Security over access to sensitive areas was jeopardized due to the lack of  accountability over the issuance of master keys at an IRS facility, thereby  increasing the likelihood that an unauthorized person could gain  possession of a master key and use it to unlock sensitive computing areas  within the facility.
These information security control weaknesses exist primarily because  IRS has not fully implemented an agencywide information security  program to effectively protect the information and information systems  that support the operations and assets of the agency. Consequently, these  identified weaknesses in information security controls impair IRS’s ability  to ensure the confidentiality, integrity, and availability of sensitive  financial, taxpayer and FinCEN’s BSA data hosted at its facility.
We made recommendations to the Secretary of the Treasury to direct the  IRS Commissioner to take several actions to fully implement a  comprehensive agencywide information security program and to  determine whether taxpayer data have been disclosed to unauthorized  individuals. In addition, we recommended that the Secretary of the  Treasury direct the FinCEN Director to perform an assessment to  determine whether BSA data have been disclosed to unauthorized  individuals. The Acting Deputy Secretary of the Treasury generally agreed  with the recommendations and identified specific completed and planned  corrective actions, which we did not verify.
section_title: Concluding Observation
paragraphs: IRS is operating in a difficult budget environment. On the one hand, its  workload—represented by the number of returns and the complexity of  those returns—is growing. On the other hand, IRS faces pressure to hold  down spending.
Addressing the resource challenges summarized in this statement can help  policy makers assessing IRS’s budget. Long-term goals can help determine  overall budgetary requirements. Revenue enhancements and the  leveraging of nonfederal resources can help, to some extent, meet those  requirements. Productivity gains and successful new investments in  systems can help ensure that existing resources are used as efficiently as  possible, helping minimize the need for additional funding. Addressing  these resource challenges does not promise a painless way out of difficult  budget decisions. However, it could provide a clearer picture of the  tradeoffs involved.
Mr. Chairman, this concludes my testimony. I would be happy to answer  any questions you may have at this time.
section_title: Contact and Acknowledgments
paragraphs: For further information on this testimony, please contact James White on  (202) 512-9110 or whitej@gao.gov. Individuals making key contributions to  this testimony include Perry Datwyler, George Guttman, Tonia Johnson,  David Lewis, Neil Pinney, Jeffrey Schmerling, Henry Sutanto, and  Jenniffer Wilson.
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