IRS 2016 Budget: IRS Is Scaling Back Activities and Using Budget Flexibilities to Absorb Funding Cuts
Published: 2015-06-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The financing of the federal government depends largely upon IRS's ability to collect taxes, including providing taxpayer services that make voluntary compliance easier and enforcing tax laws to ensure compliance with tax responsibilities. For fiscal year 2016, the President requested $12.9 billion in appropriations for IRS; the request is almost $2 billion (18 percent) more than IRS's fiscal year 2015 appropriation.
Because of the size of IRS's budget and the importance of its service and compliance programs for all taxpayers, GAO was asked to review the fiscal year 2016 budget request for IRS and the effects of recent budget constraints. In February 2015, GAO reported interim information on IRS's budget. This report (1) analyzes select IRS business units' budget and staffing; (2) describes how IRS is managing in a constrained budget environment; (3) assesses key data for IT investments; and (4) describes IRS progress in implementing selected GAO open recommendations. To conduct this work, GAO reviewed the fiscal year 2016 CJ, IRS and Office of Management and Budget guidance, and IRS data from fiscal years 2010 to 2014, and interviewed IRS officials.
section_title: What GAO Found
paragraphs: Business unit trends. Internal Revenue Service (IRS) total appropriations declined from a high of $12.1 billion in fiscal year 2010 to $11.3 billion in fiscal year 2014, a reduction of about 7 percent. GAO selected business units with large declines in obligations—both dollar amount and percent—from fiscal year 2010 to fiscal year 2014, the most current spending data available. To absorb budget cuts, the business units GAO reviewed—Human Capital Office, Office of Chief Counsel, and Small Business/Self-Employed Division—each reduced staff (full-time equivalents or FTEs) by 16 to 30 percent. According to officials, they also prioritized legally required programs, such as tax litigation, and reduced some programs or services, such as limiting non-filer investigations, postponing software acquisitions, and delaying approximately 24,000 employee background reinvestigations. Such scaled back activities potentially reduce program effectiveness or increase risk to IRS and the federal government.
Budget environment. IRS's budget decreased by an additional $346 million from fiscal year 2014 to fiscal year 2015. IRS used its flexibility to absorb this reduction by allocating user fee revenue, which comprised 3.4 percent of its budget, or $416 million, in fiscal year 2014. Additionally, to increase agency-wide coordination of budget decisions, IRS formed a new office and committee to inform budget formulation and execution decisions.
Information technology data. IRS requested $3.2 billion for information technology (IT) investments. This accounted for 23 percent of IRS's budget request for fiscal year 2016. However, IRS provided inaccurate data on actual obligations to date for major IT investments in its congressional justification (CJ) for fiscal year 2016. As a result, Congress does not have accurate, reliable, and complete data on IT investments to inform its budget decisions or aid in its oversight. Additionally, IRS did not use standard definitions for “life-cycle cost” and “projected useful life of the current asset” or explain the terms in a way that could be understood and used.
Open GAO recommendations. Eighty-eight recommendations and eight matters for congressional consideration could have financial implications if implemented. IRS made progress implementing many recommendations, including two particularly important ones. First, IRS has begun to estimate return on investment for specific compliance projects within its correspondence exam program. Second, IRS's updated cost estimate for the Patient Protection and Affordable Care Act improved from previous versions and met or substantially met the criteria in three of four overall categories, but is still not reliable because it only partially met the criteria in the overall credibility category.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS implement controls to ensure that information reported on major IT investments is accurate, define key terms in the CJ, and continue implementing previous recommendations. IRS agreed with the recommendations.

section_title: Letter
paragraphs: The financing of the federal government depends largely upon the  Internal Revenue Service (IRS), which collected 93 percent of federal  receipts in fiscal year 2014. IRS’s mission is to provide taxpayers top- quality services by helping them understand and meet their tax  responsibilities and to enforce the law with integrity and fairness to all.  The President proposes a budget that reflects how IRS plans to use its  resources to accomplish these tasks, while also continuing to invest in  modernizing its information systems, among other things. In February  2015, we reported that IRS’s fiscal year 2015 appropriations ($10.9  billion) and staffing levels (81,279 full-time equivalents, or FTEs) continue  a decline that has occurred over several years and are now below fiscal  year 2009 levels. Since fiscal year 2010, IRS’s annual appropriations  have declined by $1.2 billion (9.9 percent), and staffing has declined by  about 13,000 FTEs (14.1 percent).requested $12.9 billion in appropriations for IRS to support 90,524 FTEs.  The President’s Budget request is almost $2 billion (18 percent) and  about 9,200 FTEs (11 percent) more than the fiscal year 2015  appropriation.
For fiscal year 2016, the President  Because of the size of IRS’s budget and the importance of its service and  compliance programs for taxpayers, you asked us to review its fiscal year  2016 budget request and the effects of recent budget constraints. In this  report we (1) analyze IRS’s business units’ budgets for fiscal years 2010  through 2014 and for selected units, describe staffing and programs  changes; (2) describe how IRS plans to absorb fiscal year 2015 budget  cuts and the steps IRS has taken to improve agency-wide coordination on  budget decisions; (3) summarize and assess key performance  information for IRS’s major information technology (IT) investments; and  (4) describe our open recommendations and prior work that, if  implemented, could improve IRS operations or have a financial impact or  that relate to legislative proposals.
We selected three business units or fund centers—Human Capital Office  (HCO), Office of Chief Counsel (Counsel), and Small Business/Self- Employed Division (SB/SE)—to determine how they managed their  budget and to identify examples of the effects of budget reductions. We  selected business units with large declines in obligations—both dollar  amount and percent—from fiscal year 2010 to fiscal year 2014, the most  current spending data available. One business unit was selected from  each category of fund center: support (HCO), functional (Counsel), and  operating (SB/SE). We also analyzed IRS’s Financial Management  Codes Handbooks and conducted interviews and reviewed  documentation from Corporate Budget and each of the selected business  units. In addition, we reviewed documentation about IRS’s budget  execution process and IRS’s fiscal year 2016 congressional justification  (CJ).
To examine planned reductions for 2015, we reviewed IRS documents on  its proposed fiscal year 2015 budget savings and reductions. To describe  IRS’s user fee funding, we reviewed IRS’s authority to collect and spend  user fees, and the President’s Budget requests from fiscal years 2013  through 2016. To describe efforts to increase coordination, we reviewed  IRS documents on the Program and Budget Advisory Committee and the  Planning, Programming, and Audit Coordination (PPAC) office. In  addition, we interviewed IRS officials in Corporate Budget.
We analyzed reported cost and schedule data for major IT investments  and interviewed agency officials to assess the accuracy of these data and  the procedures used to report information to Congress. We compared key  performance data reported in the fiscal year 2015 and 2016 CJs to other  IRS data and assessed the extent to which IRS reporting complied with  Office of Management and Budget (OMB) guidance and GAO internal  control standards.
Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and  Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30,  2010), which we refer to collectively as PPACA. IRS refers to PPACA by the acronym for  the Affordable Care Act, ACA. 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.
subsections: section_title: Background
subsections: section_title: IRS Budget Formulation and Execution Structures
paragraphs: IRS formulates its budget at three levels: (1) appropriation account, (2)  budget activity, and (3) program activity. IRS requests funding by  appropriation accounts, which align broadly with its strategic goals, which  are to (1) deliver high quality and timely service to reduce taxpayer  burden and encourage voluntary compliance; and (2) effectively enforce  the law to ensure compliance with tax responsibilities and combat fraud.  IRS’s CJ presents funding and FTE information at the appropriation  account and budget activity levels. In addition, it provides descriptions of  program activities within each budget activity. IRS has four appropriation  accounts (fiscal year 2015 appropriation listed in parentheses):
Enforcement ($4.86 billion): Funds activities such as determining and  collecting owed taxes, providing legal and litigation support, and  conducting criminal investigations.
Operations Support ($3.64 billion): Funds activities including rent  and facilities expenses, IRS-wide administration activities, and IT  maintenance and security.
Taxpayer Services ($2.16 billion): Funds taxpayer service activities  and programs, including pre-filing assistance and education, filing and  account services, and taxpayer advocacy services.
Business Systems Modernization ($290 million): Funds the  planning and capital asset acquisition of IT to modernize IRS business  systems.
Budget activities divide appropriation accounts into additional functions.  For example, the Enforcement appropriation is broken into three budget  activities: Investigations, Exam and Collections, and Regulatory. Each  budget activity, in turn, has multiple program activities. For example,  Exam and Collections has 20 program activities, such as Tax Reporting  Compliance – Field Exam; Earned Income Tax Credit Management and  Administration; and Whistleblower Office. In addition to program activities,  the lower levels of the budget formulation and budget execution  structures include business units and other areas of interest, which are  not discrete categories. For example, Wage and Investment is one  division within IRS and can be referred to as a business unit, while  identity theft would be considered an area of interest that crosses  divisions within IRS.
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. IRS executes its budget across  18 fund centers, which manage and distribute funds.
section_title: Budget Flexibility
paragraphs: IRS has some flexibility in how it allocates its resources. IRS may shift  resources among program activities (activities within a budget activity).  For example, IRS could shift resources among any of the 20 program  activities within the Exam and Collection budget activity without  congressional approval or notification. Additionally, IRS may reprogram  funds among budget activities within certain limits.
While IRS cannot transfer resources from one appropriation account to  another without specific statutory authority to do so, the agency still has  some flexibility because fund centers may receive funds from more than  one appropriation account. Over half of IRS fund centers or business units receive funding and obligate funds from multiple appropriation  accounts. IRS management allocates funds to each business unit  (subject to transfer and reprogramming limitations) and has more  flexibility when there are multiple accounts from which it may fund a  business unit.
IRS also has flexibility in how it allocates user fees because it determines  the amount of funds transferred to each appropriation account. In fiscal  year 2014, IRS transferred $416 million in user fee funds to its  appropriations accounts to be spent. IRS collects user fees for various  activities such as assisting taxpayers in complying with their tax liabilities,  clarifying the application of the tax code to particular circumstances, and  ensuring the quality of paid preparers of tax returns.
section_title: Information Technology
paragraphs: IT comprises a significant portion of IRS’s budget and plays a critical role  in enabling IRS to carry out its mission and responsibilities. The fiscal  year 2015 appropriation includes about $2.5 billion for IT investments; this  represents over 20 percent of the total IRS budget. IRS relies on  information systems to process tax returns, account for tax revenues  collected, send bills for taxes owed, issue refunds, assist in the selection  of tax returns for audit, and provide telecommunications services for all  business activities, including the taxpayer toll-free access to tax  information, among other things.
IT investments are funded through both the Operations Support and the  Business Systems Modernization appropriation accounts as well as  through user fees. The President’s fiscal year 2016 budget request  includes $3.24 billion for IRS IT investments. Of that amount, $2.26 billion  is for 20 major IT investments.to additional reporting requirements.
section_title: Funding Declined for Most IRS Business Units and Tradeoffs to Manage Reductions May Affect Some Programs’ Effectiveness and Increase Risk
subsections: section_title: Fifteen of Eighteen Business Units Decreased Spending
paragraphs: IRS’s total appropriations declined from a high of $12.1 billion in fiscal  year 2010 to $11.3 billion in fiscal year 2014, a reduction of about 7  percent. Reflecting IRS’s overall budget decline, spending fell in 15 of  the 18 fund centers or business units from fiscal year 2010 to fiscal year  2014, and spending in 9 fund centers declined 10 percent or more. For  example, SB/SE, which was the largest business unit in fiscal year 2010,  experienced a 14 percent decrease in obligations—from $2.6 billion to  $2.3 billion—from fiscal year 2010 to fiscal year 2014. Over half of IRS  fund centers or business units receive appropriations from multiple  accounts. As shown in figure 1, of the 18 fund centers, 11 obligate funds  from two or more of IRS’s four appropriation accounts.fund centers obligate funds from only one account and 5 of those 7 serve  in an operational support capacity, such as Agency Wide Shared  Services, HCO, and Chief Financial Officer. Of the 9 fund centers that  experienced a decline in obligations of at least 10 percent, 5 receive  funding from only one appropriation account. Business units that receive  funds from more than one appropriation account may have increased  flexibility because IRS can balance reductions in one account with  resources from another account, provided that any shifts in funding do not  violate appropriation, transfer or reprogramming restrictions.
section_title: Selected Business Units Scaled Back Activities, Potentially Reducing Program Effectiveness or Increasing Risk to IRS and the Federal Government
paragraphs: Each business unit we examined—HCO, Office of Chief Counsel, and  SB/SE—took actions to absorb budget reductions. One common element  among each of the business units examined is that they spend 80 percent  or more of their funds on labor. When IRS receives its budget, the  Corporate Budget Office coordinates with business units to ensure that  each business unit has sufficient funding to support FTEs already  onboard. The review of FTEs aligns anticipated salary and benefit costs  to available appropriated funding for each business unit. As seen in Table  1, from fiscal year 2010 to fiscal year 2014, FTEs declined through  attrition in each of the business units examined.
Because labor comprises the majority of these business units’ expenses,  unit managers are limited in how they implement budget cuts. According  to business unit officials, budget reductions were often implemented by  decreasing the amount or type of activity performed. One key factor that  influenced business units’ decisions about how to prioritize activities was  whether the activity was statutorily mandated. According to IRS officials,  statutorily mandated activities—such as tax litigation in the Office of Chief  Counsel—remained a priority.
subsections: section_title: Examples of Programs and Services Reduced or Eliminated
paragraphs: Non-filer investigations. SB/SE significantly reduced the individual  and business non-filer cases it pursues. IRS detects taxpayers that  failed to file—non-filers—by matching third party information with tax  returns for individuals, and relying on open filing requirements and  third party information for businesses. In tax year 2010, IRS started  3.5 million individual non-filer cases and 4.3 million business non-filer  cases. In tax year 2014 non-filer cases dropped to 2.0 million for  individuals and 1.8 million for businesses, a reduction of 43 percent  and 58 percent, respectively. According to SB/SE officials, detecting  and pursuing non-filers is not mandatory. By not pursing non-filers,  however, IRS misses the opportunity to bring a noncompliant taxpayer  into the tax system, and the government could forego potential  revenue from taxes, penalties and interest payments.
Private letter rulings. The Office of Chief Counsel limited the number  and scope of private letter rulings—a written statement issued by IRS  at the request of a taxpayer that interprets and applies tax laws to the  taxpayer’s represented set of facts. Private letter rulings decreased by  30 percent—from 935 to 651—from fiscal year 2010 through 2014.  The drop in private letter rulings means that fewer taxpayers receive a  ruling prior to filing, causing uncertainty for them and the tax  community. According to Counsel officials, one benefit of the private  letter rulings is that they can alert IRS attorneys to nascent tax issues.  Private letter rulings are not mandatory and IRS charges a user fee  for the service to offset the cost of the service. However, since there  are a limited number of FTEs, IRS decided to scale back work in the  area in order to shift those FTEs to other activities, such as issuing  regulations and public guidance.
Bankruptcy program. According to Counsel officials, a bankruptcy  program supported by approximately 30 FTEs was eliminated. IRS  attorneys supporting the program were appointed as Special Assistant  United States Attorneys to represent IRS in bankruptcy court instead  of Department of Justice attorneys. The program was identified as low  priority because it was not required by statute.
section_title: Examples of Deferred Programs or Acquisitions
paragraphs: Software acquisitions. According to officials in the Office of the Chief  Counsel, the limited budget for litigation-related information  technology has prevented Counsel from acquiring modern, industry  standard electronic discovery software. Such software is used to  capture and preserve documents for the discovery phase of tax and  other litigation. According to Counsel officials, the outcome of tax  litigation cases has been impacted because IRS does not have the  software. For example, parties to a lawsuit frequently request emails  and other computer files related to a particular topic or keywords, and  the software thoroughly and efficiently identifies the files, minimizing  the need for time-intensive manual review of the files. IRS was  recently sanctioned in court and ordered to reimburse a plaintiff  $12,500 for the cost of depositions because it did not have the  technical capability to produce appropriate documents for discovery.  This issue has been raised with IRS management through the  Enterprise Risk Management and budget processes. Counsel officials  stated that IRS has funded other high-priority IT systems, but that  there has not been sufficient funding to acquire e-discovery software  or support an effective e-discovery function. IRS estimates the cost of  the software is $10 million.
Background reinvestigations. IRS has postponed reinvestigations  for moderate risk employees since fiscal year 2013. Almost half of  IRS’s FTEs, approximately 38,000 employees, are identified as  moderate risk, and 24,000 reinvestigations have been postponed. In  November 2011, the Office of Personnel Management amended its  regulations to direct that federal employees occupying positions of  public trust (those designated as high or moderate risk) undergo a  background reinvestigation every 5 years. Periodic reinvestigations  allow agencies to determine if employees are still suitable for U.S.  government employment, or still eligible to hold a sensitive position.  IRS completed reinvestigations in fiscal year 2012 at a cost of  approximately $3.9 million. For fiscal year 2016, the President’s  Budget requests $3.5 million and 11 FTEs for IRS to implement  federal investigative standards, which includes reinvestigations of  employees.
section_title: IRS Is Using Its Budgeting Flexibility and Taking Steps to Improve Agency-Wide Coordination of Budget Decisions
subsections: section_title: IRS Has Flexibility in Spending User Fee Revenue
paragraphs: In fiscal year 2015, IRS plans to allocate less user fee revenue to the  taxpayer services account than in previous years ($49 million, compared  to around $180 million in fiscal years 2012, 2013, and 2014). IRS plans to  allocate a larger amount to the operations support account ($411 million,  compared to $132 million, $183 million, and $218 million in fiscal years  2012, 2013, and 2014, respectively). According to IRS officials,  management decided to allocate more user fee funds to operations  support in fiscal year 2015, in part because that year’s appropriation for  operations support was $161 million (4.2 percent) less than fiscal year  2014, while taxpayer services was not reduced during that time frame.  According to IRS officials, user fee revenue allocated to operations  support will be used to meet requirements to implement PPACA and fund  investment in the design, development, and deployment of mainframe  and server investments which can help IRS better respond to taxpayers.  IRS officials said that user fees allocated to operations support reduce  system downtime, which positively affects IRS’s ability to respond to  taxpayers, process returns, collect revenue and issue refunds.
Although IRS services and operations are primarily funded through  annual appropriations, IRS has the flexibility to supplement its  appropriations with other resources, such as user fees. IRS deposits user  fees that it is authorized to retain into its Miscellaneous Retained Fees  Fund before transferring funds to an appropriation account to be spent. In  fiscal year 2014, $677 million was available in the account. IRS  transferred $416 million of that money to its appropriation accounts which  accounted for 3.4 percent of IRS’s total available resources. Remaining  funds are carried over to the next fiscal year. Table 2 shows user fee  funds transferred to IRS’s appropriation accounts during recent fiscal  years. For fiscal year 2015, IRS plans to transfer a total of $481 million.
section_title: IRS Planning Efforts Informed the Management of $346 Million in Budget Reductions
paragraphs: IRS managed reductions by strictly limiting hiring, overtime, and overhead  costs. The reductions were informed by a December 2014 planning  exercise. In this exercise, IRS prepared for how it would absorb a  hypothetical 5 percent budget reduction. Business unit managers  identified funding requirements for current activities and categorized  programs as high, medium, or low priority, including how the proposed  reduction would affect program spending and FTE counts. Business unit  officials identified and documented legally or contractually required  activities and also identified potential risks and the potential performance  impact of cutting or not funding each activity. Ultimately, IRS’s budget  decreased $346 million from fiscal year 2014 to fiscal year 2015, a 3.1  percent decline. IRS considered furloughing employees for up to 2 days  in fiscal year 2015 to help absorb the budget cuts; it since determined that  furlough days will not be necessary because it is able to absorb the  reductions in other areas.
Following the planning exercise, in January 2015, IRS identified the  following actions to absorb this budget reduction.
External hiring freeze: IRS plans to replace few employees who  leave the agency. In an agency with over 80,000 FTEs, all requests  for external hiring in fiscal year 2015 must be approved by a direct  report to the Commissioner. Specifically, requests for new hires are  reviewed by the Deputy Commissioner for Operations Support,  Deputy Commissioner for Services and Enforcement, and in certain  cases, the Chief of Staff.
Internal hiring restrictions: New policies require that resources be  available to cover both current year and annualized future costs for  any internal hiring, permanent promotions, or reassignments. These  policies ensure that employee transfers are consistent with the  workflow needs of the agency.
Overtime restrictions: Overtime was eliminated except for a small  amount to support the tax filing season or for mission critical needs.  IRS uses overtime frequently during the tax filing season to process  tax returns and provide taxpayers service, such as by telephone or at  assistance centers. All overtime requests were to be approved by the  Deputy Commissioners or the Chief of Staff to the Commissioner.  According to IRS officials, limitations on overtime are estimated to  save approximately $75 million.
Overhead cost reductions: Spending on travel and training,  contracts, and supplies and printing is restricted and business unit  heads are required to review the priorities for contract spending and  identify lower cost alternatives.
section_title: IRS Is Working to Increase Agency-Wide Coordination in Budget Decisions in Response to Constrained Budget Environment
paragraphs: Recently, IRS launched two efforts to increase management coordination  in budget formulation and execution decisions. In one effort, IRS  established the Program and Budget Advisory Committee to help it  improve its process for determining agency-wide priorities and for  allocating resources to fund those priorities. According to IRS officials,  this committee was formed in October 2014. It is intended to prevent  resources from being allocated on a first come, first served basis or on  some other arbitrary method. Members of the committee include  executives from Strategy and Finance, Budget Execution, Systems and  Analysis, and Corporate Budget; the Commissioner and Deputy  Commissioners have decision-making authority. According to IRS, the  committee will be responsible for overseeing and reviewing IRS’s budget  execution and making recommendations on all matters relating to its  financial operations. These include making recommendations for  allocating funds, prioritizing mission critical needs, and assessing and  reporting risk with regard to expending resources. IRS expects the  outcomes to include a detailed decision-making process for prioritizing  IRS-wide requirements that are aligned with its strategy and resource  needs, open communication and transparency, and identification of risk  and requirements in excess of available funds.
In another effort, responding in part to our June 2014 recommendation,  IRS established the Planning, Programming, and Audit Coordination  (PPAC) office in 2014 to improve coordination of (1) current and  completed audits of IRS activities and (2) resource decision making and  strategic planning. According to IRS, PPAC is to facilitate coordination  among business units and operating divisions to improve resource  allocation and planning as part of the budget formulation process. PPAC  is to drive long-term planning for resource allocation to be seen first in the  fiscal year 2017 budget. As envisioned, the new strategic approach is to  include consideration of short-term trade-offs with long-term investments  along with post-evaluation of investments.
section_title: IRS Reported on Major IT Investments in Its Fiscal Year 2016 Congressional Justification, but Some Information Was Inaccurate or Unclear
subsections: section_title: IRS Provided Inaccurate Data to the Congress
paragraphs: In its fiscal year 2016 CJ, IRS provided detailed information about its  major IT investments, as it did in the 2014 and 2015 CJs; however, the  information provided on actual obligations to date was inaccurate, due to  potential deficiencies in some internal controls over the preparation of the  CJ. IT is a significant portion—about 23 percent—of the total IRS budget  request for fiscal year 2016. The request includes approximately $2.26  billion to fund 20 major IT investments and approximately $976 million for  other IT investments. In the fiscal year 2016 CJ, IRS defines “actual  obligations to date” as the actual obligations through fiscal year 2014  specific to each asset. However, despite this definition, the numbers  reported for most investments only include obligations through fiscal year  2013. Because the CJ reports inaccurate information about amounts  obligated to date for most of the 20 listed major IT investments, Congress  does not have accurate, reliable, and current data to inform its budget  decisions or aid in its oversight.
IRS increased the amount of information it reported on major IT  investments in recent years’ CJs, and the fiscal year 2015 and 2016 CJs  included information under the label “actual obligations to date” for each  investment. Beginning with the fiscal year 2014 CJ, IRS reported detailed  and precise quantitative and qualitative information on the cost and  duration of its major IT investments. Information reported included life- cycle costs, projected useful life of the current asset, and anticipated  benefits for each investment. In the fiscal year 2015 CJ, IRS added  information on actual obligations to date for each of the major IT  investments listed in the CJ. IRS provided this additional information in  response to a recommendation we made in September 2013 for all major  IT investments.
IRS reported inaccurate information on actual obligations to date for many  of the major IT investments in the fiscal year 2016 CJ. The CJ states that  these amounts represent obligations through fiscal year 2014. However,  for all of the major IT investments listed in the CJ, with the exception of  one newly added major investment, the amounts reported for actual  obligations to date through fiscal year 2014 were the same as the  amounts reported in the previous year’s CJ as actual obligations through  fiscal year 2013. Data obtained separately from IRS show that amounts  were obligated for all of these investments in fiscal year 2014, which  indicates that the data were not updated in the CJ.
Officials in IRS’s Corporate Budget office stated that the data may not  have been updated since they used last year’s information as a starting  point in preparing the fiscal year 2016 CJ. According to the officials, staff  in the Information Technology office prepare this section of the CJ and  send it to Corporate Budget for inclusion in the final submission.  Corporate Budget officials relied on data provided by the Information  Technology staff without using any internal control procedure, such as  checking the data against a reliable source, to confirm that these data  were correct before including them in the CJ.
Standards for Internal Control in the Federal Government calls for  agencies to ensure that ongoing monitoring occurs during the course of  normal operations. Monitoring should be performed continually and be  ingrained in the agency’s operations; it includes regular management and  supervisory activities, comparisons, reconciliations, and other actions  people take in performing their duties. Without such controls, IRS risks  continued errors in the information on IT investments reported in its CJ.  Such errors could negatively affect Congress’ ability to obtain accurate  information on major IT investments needed to inform future budget  decisions and oversight.
section_title: Some IT Investment Information Was Unclear Because IRS Did Not Use Standard Definitions
paragraphs: IRS reported information on “life-cycle cost” and “projected useful life of  the current asset” for each major IT investment in the fiscal year 2016 CJ,  but did not use standard definitions for these terms or define or explain  the terms in such a way that they could be understood and used.  Agencies are required to use standard terms established by the  Comptroller General, in consultation with OMB, in providing fiscal, budget,  and program information to Congress. The Comptroller General has  established the following definition of life-cycle cost: “The overall  estimated cost, both government and contractor, for a particular program  alternative over the time period corresponding to the life of the program,  including direct and indirect initial costs plus any periodic or continuing  costs of operation and maintenance.” OMB’s Capital Programming  Guide applies this definition to capital assets: “The cost of a capital asset  is its full life-cycle cost, including all direct and indirect costs for planning,  procurement (purchase price and all other costs incurred to bring it to a  form and location suitable for its intended use), operations and  maintenance (including service contracts), and disposal.”
IRS did not report data that are consistent with the required definition of  “life-cycle cost” or offer an alternative definition. IRS Information  Technology officials told us that the reported amounts represent  estimates of full life-cycle costs for some major IT investments. For other  investments, these amounts represent estimated costs for the current  fiscal year and 2 future fiscal years. According to IRS officials responsible  for preparing this portion of the CJ, they did not consider how long the  investment was expected to last when deciding which estimates to report.  Instead, they reported full life-cycle cost estimates when such estimates  were available. When such estimates were not available, the officials  reported 3-year estimates. However, the CJ identifies all investments’  reported life-cycle costs as representing full life-cycle costs.
In addition, IRS did not explain the meaning of the term “projected useful  life of the current asset” in the CJ. In the Financial Services and General  Government Appropriations Act, 2015, Congress directed IRS to include  in its fiscal year 2016 CJ a summary of cost and schedule performance  information for its major IT systems. In order for this performance  information to be useful to Congress, the metrics reported in the CJ need  to have the basic attributes of successful performance measures. As we  previously reported, one of these attributes is clarity: a measure of  performance has clarity when it is clearly stated and the name and  definition are consistent with the methodology used for calculating it.  IRS officials told us the dates reported under “projected useful life of the  current asset” are not based on a projection about the date at which the  current assets will no longer be useful, but are instead arbitrary dates  several years in the future and do not represent projections of the useful   According to IRS officials, the years reported for  life of IT investments.most investments represent an arbitrary number of years, such as 3 or 5,  after the current year. In some cases, the reported year may represent a  projection of the useful life of the investment. However, according to an  official in IRS’s Information Technology office, different people are  responsible for reporting on different investments, and they may report  information according to different understandings of the meaning of the  term “projected useful life of the current asset.” The years reported in the  CJ under “projected useful life of the current asset” for the 20 listed major  IT investments are the following: 2017 (1 investment), 2018 (2  investments), 2019 (10 investments), 2020 (5 investments), 2021 (1  investment), and 2034 (1 investment).
As a result of this arbitrary process for reporting projected useful life,  some of the information reported in the CJ is inconsistent with IRS’s plans  for its major IT investments. For example, according to IRS Information  Technology officials, they plan to continue using the Return Review  Program after the Electronic Fraud Detection System is no longer in use.  However, the fiscal year 2016 CJ reports a “projected useful life of the  current asset” of 2020 for the Return Review Program and a later date,  2021, for the Electronic Fraud Detection System. This sequence of dates  is inconsistent with the plan to stop using the Electronic Fraud Detection  System while continuing to use the Return Review Program. For another  major IT investment, the Affordable Care Act Administration investment,  IRS’s Estimation Program Office has estimated costs for the investment  through fiscal year 2026. This estimate indicates that IRS plans to use the  Affordable Care Act Administration investment through fiscal year 2026.  However, the CJ reports that the “projected useful life of the current  asset” for the Affordable Care Act Administration investment is 2018.
Without clear and consistent definitions of these terms, the information  IRS is reporting is of limited usefulness. As a result, Congress and other  stakeholders do not have reliable information to make budget decisions  about IT investments.
section_title: IRS Is Taking Steps to Implement GAO Recommendations, Including Those Related to Greater Use of Return on Investment Data and Improvements in the PPACA Cost Estimate
paragraphs: As of February 2015, we have 88 open recommendations and 8 matters  for congressional consideration that could have financial implications if  implemented. Since we last reviewed open recommendations to IRS and  matters for congressional consideration during the fiscal year 2015  budget review, 19 recommendations to IRS were closed as implemented.  For more information on open recommendations, see appendixes IV and  V.
Additionally, we have conducted work related to 17 of the 35 legislative  tax proposals included in the fiscal year 2016 CJ for IRS. For information  about legislative proposals related to our open recommendations, see  appendix VI.
subsections: section_title: Calculating and Using Return on Investment Data to Inform Resource Allocation Decisions Is a Long-Term Effort for IRS
paragraphs: In June 2014, we recommended that IRS use actual return on investment  (ROI) calculations as part of resource allocation decisions. IRS has  made progress in response to this recommendation. Specifically, IRS’s  Research, Analysis, and Statistics Division has begun to estimate  marginal direct revenue and marginal cost—the two key elements used to  calculate return on investment data—attributable to specific compliance  projects within its correspondence exam program. It plans to incorporate  these estimates for use by SB/SE and Wage and Investment business  unit managers for exam selection into the Exam Planning Scenario Tool,  which is being developed by the Office of Compliance Analytics. That tool  is intended ultimately to enable exam planners and business unit  management to explore a wide range of potential exam plan scenarios  and to compare the alternative effects on various enforcement objectives,  including revenues collected and reduced taxpayer burden. Considerable  work remains to be done on the multiple components of this long-term  effort.
We also recommended that IRS calculate actual ROI for implemented  initiatives. However, IRS noted that determining the impact of an initiative will always  rely on estimates, as the results of an initiative are the difference between  actual results and what would have occurred in the absence of the  initiative, which cannot be measured. Given that IRS is unable to attribute  revenues to specific employees hired under an initiative, officials believe  that any feasible estimate would need to be based on numerous  assumptions and, therefore would be too uncertain to be useful. For this  reason, IRS does not consider this additional analysis an effective use of  its scarce research resources. However, we believe that IRS should be  able to provide some information to Congress, such as whether funds that  were requested for initiatives were used in the manner that IRS originally  proposed.
IRS agreed that having this information would be useful.
See GAO-14-605.
section_title: Updated PPACA Cost Estimate Showed Improvement and Met or Substantially Met Criteria in Three of Four Overall Categories, but Is Still Not Considered Reliable
paragraphs: IRS’s PPACA cost estimate identifies the costs of planning, developing  and implementing the IT systems needed to support its role in  implementing PPACA. In February 2015, IRS released version 3 of the  PPACA cost estimate as part of its ongoing practice to refine its cost  estimate and address our prior recommendation. The cost estimate totals  $2.72 billion (adjusted for inflation) from mid-fiscal year 2014 through  fiscal year 2026; when prior years are included, the estimate increases to  $3.43 billion from fiscal years 2010 through 2026 (adjusted for inflation).  This updated cost estimate is a significant increase from the previous  total of $1.89 billion (not adjusted for inflation) from fiscal years 2010  through 2026. According to IRS officials, this increase is due to a  change in the scope of PPACA implementation activities which resulted in  additional releases. For example, the new releases respond to regulatory  changes in the requirements for the Small Business Health Options  Program, add in the cost of sending preliminary notices to employers not  offering employee coverage, and take into account the implementation of  the excise tax on high-cost health plans that will begin in 2018. However,  IRS has not finalized the scope of work for Release 7.1 and beyond,  which raises questions about IRS’s ability to estimate costs for these  releases.
According to the GAO Cost Guide, a reliable cost estimate must be  comprehensive, well documented, accurate, and credible.  In September  2013, we reported that version 1 of IRS’s cost estimate for PPACA did not  fully meet best practices for a reliable cost estimate and recommended  actions IRS should take to improve its cost estimate.estimate–version 3—reflects best practices to a greater extent, as shown  in table 3. The cost estimate met or substantially met the criteria in three  of four overall categories; however, a cost estimate must meet or  substantially meet the criteria in all four overall categories to be  considered reliable. From our assessment of version 1 of the cost  estimate, of 20 sub-scores, 12 increased, 3 decreased, and 5 were  constant. See appendix VII for a table of the sub-scores. Notably, IRS has  improved documentation of how cost drivers for its sensitivity analysis   The updated cost  were selected with the score improving from partially meets to meets. As  outlined below, there are several areas related to our open  recommendation where IRS could continue to improve the cost estimate  to better meet best practices outlined in the GAO Cost Guide.
Earned value management: We previously recommended that IRS  use earned value management—a process for capturing actual costs  and comparing them to estimated costs—to capture actual costs and  use them as a basis for future updates. According to IRS officials,  earned value management is not being used to track costs. Because  of this, actual costs are not regularly being used to update the  estimate and to determine where and why variances are occurring  when there is still time to mitigate their effect on the program’s cost  and/or schedule in a manner that is consistent with best practices.  This issue affects multiple elements of the accuracy of the cost  estimate assessment.
Variance from prior estimate: The estimate includes a general  discussion of cost and schedule variance and gives an overview of  how staffing and cost estimates have changed from the previous cost  estimate; however, it does not offer a detailed discussion of the  reasons why. A proper risk and uncertainty analysis is necessary to  correctly assess the variability in the cost estimate due to program  risks. In this area, the cost estimate improved from “minimally meets”  to “partially meets.”
Risk and uncertainty analysis: IRS conducted a risk and uncertainty  analysis but did not provide evidence that showed all of the steps they  took to conduct the risk analysis, so we cannot verify that they  followed best practices. Our assessment scored this element as  “partially meets”—which is the same as our assessment of the earlier  version of the cost estimate.
Validating the estimate: IRS did not obtain a second cost estimate  and there is no program office estimate to use for comparison. 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. Our assessment  scored this element as “minimally meets”—which is the same as our  assessment of the earlier version of the cost estimate.
section_title: Conclusions
paragraphs: Over the last 5 years, IRS took steps to manage budget reductions;  however, many were short-term actions, such as strictly limiting hiring and  curtailing overtime. Some of these actions could result in future  disruptions in taxpayer services and diminished administration of our tax  system. IRS has some flexibility in how it allocates resources—including  user fee revenue—within and across business units to achieve its mission  and goals. IRS reprioritized many activities since fiscal year 2010 to  address budget reductions. Activities and services that were scaled back  remain important and may have benefits, including a positive return on  investment or enhanced compliance with the tax system. IRS tradeoffs  could lead to negative outcomes such as reduced program effectiveness  and increased risk to IRS and the federal government. This highlights the  importance of Congress and IRS working together to reexamine IRS’s  mission and priorities. To improve transparency and inform decision- making, accurate information on IT investments in the CJ is imperative.
section_title: Recommendations for Executive Action
paragraphs: To enhance the budget process and to improve transparency, we  recommend the Commissioner of Internal Revenue take the following  actions:  Implement internal controls to ensure the accuracy of information on  major information technology investments reported in the annual  congressional justification, such as obligations data.
To the extent possible, report information about major information  technology investments in the congressional justification in  accordance with the standard terms published by the Comptroller  General in the Budget Glossary (GAO-05-734SP).
When using key terms that are not defined in the Budget Glossary or  in OMB guidance, or when using a modification of these terms,  provide definitions of key terms used to report information about major  information technology investments in the congressional justification.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue for comment. In written comments reproduced in appendix VIII,  IRS agreed with our recommendations. IRS plans to conduct a  comprehensive review of its capital planning and investment control  activities, with particular emphasis on investment controls. As part of this  review, IRS plans to identify any gaps in the use of standard terms, make  recommendations for changes to standard terms, and define terms not  included in the Budget Glossary. We agree that identifying gaps and  implementing changes to enhance the budget will improve data quality.  IRS also provided technical comments on our draft report, which we  incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairman and  Ranking Members of Senate and House committees and subcommittees  that have appropriation, authorization, and oversight responsibilities for  IRS. We will also send copies to the Commissioner of Internal Revenue,  the Secretary of the Treasury, and other interested parties. In addition,  the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, 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 key contributions to this  report are listed in Appendix IX.
section_title: Appendix I: IRS Funding and FTE Data from Fiscal Year 2009 through Fiscal Year 2016
section_title: Appendix II: Non-interactive Version of Figure 1 - Fiscal Year 2014 Obligations by Fund Center and Percentage Change from Fiscal Year 2010
paragraphs: This table does not include obligations less than $1 million. In fiscal year 2014, 4 fund centers  obligated less than $1 million from additional accounts: Counsel ($222,000 from Operations Support);  Communications & Liaison ($92,000 from Taxpayer Services and $6,000 from Enforcement); Criminal  Investigations ($38,000 from Operations Support); and Privacy, Governmental Liaison and Disclosure  ($29,000 from Enforcement).
section_title: Appendix III: Summary of Major Information Technology Investments Reported in IRS’s Fiscal Year 2016 Congressional Justification
paragraphs: Appendix III: Summary of Major Information  Technology Investments Reported in IRS’s  Fiscal Year 2016 Congressional Justification Description  Enhances customer support by providing  applications that enable IRS employees to access,  validate, and update individual taxpayer accounts  on demand.
Encompasses the planning, development, and  implementation of IT systems needed to support  IRS’s tax administration responsibilities associated  with the Patient Protection and Affordable Care  Act.
Provides timely access to authoritative individual  taxpayer account information and enhances IRS’s  ability to address security, financial material  weaknesses, and long-term architectural planning  and viability.
Detects fraud at the time that tax returns are filed  in order to eliminate the issuance of fraudulent tax  refunds.
Comprises several web-based self-assisted  services that are intended to allow authorized  individuals to do business with the IRS  electronically.
Intended to implement provisions of the Foreign  Account Tax Compliance Act regarding financial  institutions reporting to IRS information about  financial accounts held by U.S. taxpayers, or  foreign entities in which U.S. taxpayers hold a  substantial ownership interest.
Represents the authoritative data source for  individual tax account data, supporting other IRS  information systems and providing a critical  component of IRS’s ability to process tax returns.
Intended to establish a new business information  matching program in order to increase voluntary  compliance and accurate income reporting.
Includes several projects that are intended to  simplify voluntary compliance using telephone  applications, Internet, and other computer  technology.
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.
Description  Provides budget, payroll, accounts  payable/receivable, general ledger functions, and  financial reporting; also used to manage budgets  by fiscal year.
Processes paper tax returns, and updates tax  forms to comply with tax law changes.
Supports products and services necessary for  daily functions for IRS employees at headquarters  and field sites.
Supports the design, development, and  deployment of server storage infrastructures,  software, databases, and operating systems.
Supports IRS’s broad and local network  infrastructure such as servers, and switches for  voice, data, and video servicing of IRS sites.
Provides web-based services to internal and  external users, such as IRS employees and other  government agencies, taxpayers, and business  partners.
Provides a secure web-based platform for  electronic tax filing of individual and business tax  and information returns by registered Electronic  Return Originators.
Aims to maximize detection of fraud, including  identity theft fraud, at the time that tax returns are  filed, to eliminate issuance of questionable  refunds.
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 an electronic format.
Provides online tools for taxpayers, such as  Where’s My Refund and Get Transcript; supports  search function and design of IRS.gov.
section_title: Appendix IV: GAO Budget-Related Recommendations to IRS That Remain Open
paragraphs: Report  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 Patient Protection and  Affordable Care Act (PPACA)  projects.
Benefit  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.
Status  As of February 2015, IRS officials reported that for  the fiscal year 2017 budget formulation process,  they have developed new instructions and  procedures for conducting cost-effectiveness  analyses, which include considering trade-offs and  alternatives of proposed investments. Also, they  plan to conduct cost-effectiveness analyses for  future significant nonenforcement initiatives when  there are alternative approaches to achieving a  given benefit and there is sufficient time to conduct  the analyses, according to officials. IRS actions are  consistent with what we recommended in June  2012; however, we cannot obtain documentation  for the fiscal year 2017 budget formulation process  because it is considered pre-decisional. When the  data is available we will assess it.
GAO-12-603   Develop a quantitative measure of  scope  At a minimum, develop a quantitative  measure of scope for its major IT  investments, in order to have  complete information on the  performance of these investments.
A quantitative measure  of scope is a good  practice as it provides an  objective measure of  whether an investment  delivered the  functionality that was  paid for.
No executive action taken. IRS officials stated that  they agreed with the recommendation when we  made it in June 2012. However, in October 2013,  IRS said it did not plan to develop a quantitative  measure of scope for its major information  technology investments. In June 2014 and again in  March 2015, IRS reported that it has practices and  processes in place that provide performance  information on its investments, including quarterly  reports to Congress and a baseline change request  process. However, neither approach includes a  quantitative measure. For this reason, we maintain  that the recommendation is still warranted.
Improve budget formulation guidance  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.
Expanding internal  guidance for pre- selection budget  formulation templates  facilitates more complete  information for internal  budget decision-making.
IRS updated budget formulation guidance for the  fiscal year 2016 budget formulation process.  Guidance instructed business units to identify the  expected benefit of the proposed budget initiative.  We requested examples of completed templates to  confirm the guidance was implemented by  business units; however, as of mid-May, 2015 we  have not received them. Once we receive the data,  we will assess it.
Benefit  Developing a cost  estimate that meets  additional best practices,  will foster accountability,  improve insight, and  provide objective  information.
Status  In February 2015, IRS released version 3 of the  PPACA cost estimate, which reflects best practices  to a greater extent, as shown in appendix VII;  however, IRS has taken action on only 2 of 5  elements of the recommendation. IRS has  improved documentation of how cost drivers for its  sensitivity analysis were selected with the score  improving from “partially meets” to “meets.” While  the score for variance from prior estimate  improved, it went from “minimally meets” to  “partially meets.” IRS has not improved its practices  related to the use of earned value management,  risk and uncertainty analysis, or validating the  estimate. 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.
Develop a long-term strategy to  address operations amidst an  uncertain budget environment. As  part of the strategy, IRS should take  steps to improve its efficiency,  including
Reexamine programs, related  processes, and organizational  structures to determine whether  they are effectively and efficiently  achieving the IRS mission.  Streamline or consolidate  management or operational  processes and functions to make  them more cost-effective.
Developing a long-term  strategy will enhance  budget planning and  improve decision making  and accountability.
In June 2014, IRS established the Planning,  Programming, and Audit Coordination office to, in  part, improve long-term planning for resource  allocation and decision making, and strategic  planning. The Planning, Programming, and Audit  Coordination office efforts will inform the fiscal year  2017 budget formulation process. We will continue  to monitor IRS’s progress and will assess a  strategy once it is developed.
Benefit  Enhanced calculation of  ROI provides greater  insight on the  productivity of a program  and can inform decision  making. implemented initiatives, compare  the actual ROI to projected ROI,  and provide the comparison to  budget decision makers for  initiatives where IRS allocated  resources.
Use actual ROI calculations as  part of resource allocation  decisions.
Status  IRS’s Research, Analysis, and Statistics Division  has begun to estimate marginal direct revenues  and marginal costs attributable to specific  compliance projects within its correspondence  exam program. It plans to use these estimates to  inform potential exams, but considerable work  remains in this long-term effort. Additionally, while  IRS agreed that having actual ROI data would be  useful, it did not believe it could determine a  feasible estimate. We believe that IRS should be  able to provide some information such as whether  funds requested were used in the manner originally  proposed. We will continue to monitor IRS’s  progress.
section_title: Appendix V: List of Open Matters for Congressional Consideration and Recommendations to IRS That Could Result in Potential Savings or Increased Revenues
paragraphs: The 44 GAO products listed below contain 88 recommendations and 8  matters for congressional consideration that could have a financial impact  if implemented.
section_title: Appendix VI: IRS Legislative Tax Proposals Related to Prior GAO Work
paragraphs: We conducted work related to 17 of the 35 legislative tax proposals  included in the fiscal year 2016 congressional justification for IRS.
section_title: Appendix VII: PPACA Cost Estimate Assessment
paragraphs: The updated PPACA cost estimate–version 3—reflects best practices to a  greater extent, as shown below. The cost estimate met or substantially  met the criteria in three of four overall categories; however, a cost  estimate must meet or substantially meet the criteria in all four overall  categories to be considered reliable. Of 20 subscores, 12 increased, 3  decreased, and 5 were constant from our assessment of version 1 of the  cost estimate.
section_title: Appendix VIII: Comments from the Internal Revenue Service
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, the following staff made key  contributions to this report: Libby Mixon, Assistant Director; Theodore  Alexander; Amy Bowser; John E. Dicken; Jennifer K. Echard; Emile  Ettedgui; Charles Fox; Robert Gebhart; Carol Henn; Melissa King;  Edward Nannenhorn; Sabine Paul; Karen Richey; Bradley Roach; Robert  Robinson; Erinn L. Sauer; Cynthia M. Saunders; Robyn Trotter; and Jim  Wozny.