Internal Revenue Service: Assessment of Fiscal Year 2005 Budget Request and 2004 Filing Season Performance
Published: 2004-03-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Effective tax administration requires a combination of quality customer service to help those who want to comply, and effective enforcement measures against those who do not. For the last few years, we have been reporting on improvements in taxpayer service and declines in enforcement. With respect to IRS's fiscal year 2005 budget request, the Subcommittee asked GAO to assess whether (1) IRS will be able to allocate more resources to enforcement, and (2) Business Systems Modernization (BSM) and other technology efforts will deliver cost savings and efficiencies in the immediate future. For the 2004 filing season performance, GAO was asked to assess IRS's performance in processing returns and providing assistance to taxpayers.
section_title: What GAO Found
paragraphs: IRS is requesting $10.7 billion in fiscal year 2005, 4.8 percent over 2004. This includes $377.3 million, primarily for additional enforcement staff, and $373 million for increased costs of maintaining current operations--funded from three sources--the budget increase, program reductions and internal savings. The request for more enforcement staff follows similar requests in IRS's past five budgets. Despite budget requests that were almost fully funded and despite realizing some savings in prior years, the number of most skilled enforcement staff declined by over 21 percent between 1998 and 2003 because of other priorities, including unbudgeted expenses. This history, and the expectation of unbudgeted costs in 2005, raises questions about whether IRS will be able to increase enforcement staff as planned. IRS's request also includes about $1.93 billion in information technology-- $285 million for BSM contractor costs and about $1.64 billion for information systems. Most BSM projects have experienced cost overruns and schedule delays postponing benefits expected under BSM. IRS reduced its BSM budget request to focus on fewer projects and is implementing plans to respond to known deficiencies. IRS has made progress in implementing investment management best practices for developing and supporting its information systems budget request. However, until IRS fully implements the improvements, its ability to develop supportable budget requests for information systems operations and maintenance will be limited. IRS's reported 2004 filing season performance in key areas improved, with the exception of the accuracy of tax law responses provided over the telephones to taxpayers, which declined. Also, the number of taxpayers seeking assistance at IRS's walk-in assistance sites declined as did the number of tax returns prepared at those sites.

section_title: Letter
paragraphs: We are pleased to participate in the Subcommittee’s hearing on the  Internal Revenue Service’s (IRS) fiscal year 2005 budget request and its  performance to date during the 2004 tax filing season.
Effective tax administration requires a combination of quality taxpayer  service to help those who want to comply, and effective enforcement  measures against those who do not. Although tax administrators  continually debate the proper balance between taxpayer service and  enforcement, the ultimate goal is to assure a high level of voluntary  compliance. Currently, about 98 percent of the money IRS collects is  received voluntarily—without any IRS enforcement action.
For the last few years, we have been reporting on trends in taxpayer  service and enforcement. During this period, IRS has noticeably improved  the quality of service to taxpayers. At the same time, there have been  declines in many of IRS’s enforcement programs and in the numbers of the  most skilled enforcement staff. Many inside and outside IRS have become  concerned that the declines in enforcement efforts have reduced  taxpayers’ incentive to voluntarily comply with the tax laws. While the  actual impact on voluntary compliance is unknown, because IRS does not  have a reliable current estimate of the overall compliance rate, the fear is  that taxpayers could lose confidence in IRS’s ability to ensure that all  taxpayers pay what they should. If taxpayers ever lose confidence that  their friends, neighbors, and business competitors are paying their fair  share of taxes, then they could become less willing to pay themselves.
One key to improving taxpayer service and enforcement is IRS’s Business  Systems Modernization (BSM) effort, now in its 6th year. If successful,  BSM is expected to allow IRS to better serve taxpayers and enforce the tax  laws without a major increase in staffing and other resources. However,  we continue to report that modernization is a high-risk area, the scope and  complexity of BSM is growing, and BSM projects are experiencing  additional costs and delays.
As you requested, our statement discusses both IRS’s 2005 budget request  and its 2004 filing season performance to date. With respect to the budget,  we assessed the likelihood that (1) IRS will be able to allocate more  resources to enforcement, and (2) BSM and other technology efforts will  deliver cost savings and efficiencies in the immediate future. With respect  to the filing season, we assessed IRS’s performance in processing returns  and providing assistance to taxpayers.
Our assessment of the budget request and BSM is based on a comparative  analysis of IRS’s fiscal year 2002 through 2005 budget requests, funding,  and expenditures, supporting documentation, and interviews with IRS  officials. Our assessment of the filing season is based on a comparison of  IRS’s performance this year to the previous two filing seasons, site visits to  an IRS processing center and walk-in sites, monitoring processing status  meetings, interviews with IRS and Treasury Inspector General for Tax  Administration (TIGTA) officials and other external stakeholders, reviews  of TIGTA and other external reports, and reviews of IRS’s Web site. We  used historical budget and performance data including filing season  performance data from reports and budget requests used by the IRS,  Department of Treasury, and Office of Management and Budget (OMB).  Although we have not verified the accuracy of the most recent data, in past  reports we have assessed IRS’s budget and performance data. As a result,  we considered the data to be sufficiently reliable for purposes of this  testimony. The budget and performance projections for fiscal years 2004  and 2005 are subject to change. Also, we did not independently validate  planned BSM projects’ cost estimates or confirm, through system and  project management documentation, the validity of IRS-provided  information on the projects’ content and progress. We performed our work  in Washington, D.C. and Atlanta, Ga. from December 2003 through March  2004, in accordance with generally accepted government auditing  standards.
In summary, our assessment of IRS’s 2005 budget request shows that:  IRS is requesting $10.7 billion, an increase of $489.8 million over fiscal year  2004. The 2005 budget proposes $377.3 million to fund new initiatives,  primarily increases in enforcement staff, and $373 million to cover the  increased costs, such as salary increases, of maintaining current programs.  IRS plans to fund the additional spending from three sources—the budget  increase, program reductions ($149.7 million) and internal savings   ($110.8 million). IRS has made increasing enforcement staff a priority in its  last five budget requests. However, despite getting its requests almost fully  funded and despite realizing some savings—although not all that were  projected—IRS did not achieve increases in enforcement staff. Staffing in  three key enforcement occupations—revenue agents, revenue officers,  and special agents—declined by over 21 percent between 1998 and 2003.  IRS funded other priorities such as unbudgeted expenses and  improvements to taxpayer service. This raises several questions and  concerns. One is whether IRS will be able to increase enforcement staff as  planned in 2005. Another is whether the declines in enforcement staff, and  the resulting declines in statistics related to IRS’s enforcement programs,  are eroding taxpayers’ incentive to voluntarily comply with the tax laws.
Included in IRS’s budget request is about $1.93 billion (including 7,385  staff years) in information technology resources. This includes (1) $285  million for the agency’s multiyear capital account that funds contractor  costs for the BSM program and (2) about $1.64 billion for information  systems, of which $1.55 billion is for operations and maintenance. The  BSM request has been developed consistent with federal guidance on  budget preparation. While BSM management controls have improved,  some weaknesses, such as cost and schedule estimating, still remain. Most  BSM projects have experienced cost overruns and schedule delays that  have postponed the delivery of benefits to taxpayers and IRS operations.  In an effort to better ensure that projects are delivered within budget and  on schedule, IRS has reduced its BSM budget request to focus on a smaller  modernization project portfolio and is implementing action plans to  respond to deficiencies noted in several recent assessments of the BSM  program. In addition, with respect to its information systems budget  request, IRS has made progress in implementing investment management  best practices for developing and supporting it. However, until IRS fully  implements planned process improvements, its ability to develop  supportable information systems operations and maintenance budget  requests will remain limited.
Our assessment of the 2004 filing season to date shows that:  IRS’s performance during the 2004 filing season has improved in most  areas compared to this time last year and the year before, based on the  data we reviewed on key filing season activities—paper and electronic  processing, telephone assistance, IRS’s Web site and walk-in assistance. In  particular, access to IRS’s telephone assistors has improved and Web site  usage has increased. However, the accuracy of responses to tax law  questions provided by telephone assistors declined the last two years.  Additionally, the number of taxpayers seeking assistance at IRS’s walk-in  sites continued to decline and IRS is shifting work from its walk-in sites to  alternative means of providing assistance, such as its volunteer  organizations and its Web site. Although it cannot be quantified, the  improvements overall in the 2004 filing season performance appear to  represent a payoff from IRS’s modernization and increased emphasis on  service since 1998.
subsections: section_title: Enhancing Enforcement Is A Key Priority But Devoting More Resources To Enforcement May Be Difficult
paragraphs: The fiscal year 2005 budget is the fifth consecutive budget request where  IRS is proposing increased staffing for enforcement and the third where it  has identified internally-generated savings to help fund the increase. The  2005 budget proposes that, of the $377.3 million for new initiatives to be  paid for either through new funding and reinvested savings, $315.2 million  or 84 percent go to enforcement. In the past, IRS has not been able to  realize all the projected savings intended to help fund enforcement staffing  increases. In addition, other priorities, including unbudgeted expenses and  taxpayer service, have consumed budget increases and internally- generated savings. This raises the question about IRS’s ability to increase  enforcement staffing as planned in 2005.
subsections: section_title: IRS is Asking For Significantly More For Enforcement in 2005
paragraphs: IRS’s fiscal year 2005 budget request is $10.7 billion, up $489.8 million or  4.8 percent from the amount appropriated for fiscal year 2004. IRS’s  request identifies a total of $750.3 million of new proposed spending— $377.3 million for new initiatives, primarily enforcement, and $373 million  to maintain current operations (such as salary increases included in the  budget). IRS plans to fund the additional spending from three sources— budget increases, program reductions, and internal savings. IRS is  proposing to receive $489.8 million in budget increases, gain $149.7 million  from program reductions, primarily from reducing the amount for BSM,  and save $110.8 million from process improvements. For context about  IRS’s staff resources, we provide information about how IRS allocated  those resources in fiscal year 2003 to various functions including returns  processing, taxpayers service and enforcement in appendix I.
In its 2005 budget request, IRS makes increasing enforcement staffing its  priority. IRS identified its priority enforcement areas as:    promoters of tax schemes,    misuses of offshore transactions,    uses of corporate tax avoidance transactions,    underreporting of income by higher income taxpayers, and  failures to file and pay large amounts of employment taxes.
IRS is proposing to spend $377.3 million on new initiatives; $315.2 million,  or 84 percent is slated for enforcement initiatives. The rest is for  infrastructure projects to, for example, consolidate paper processing  operations. The major enforcement initiatives include:    $90.2 million and 874 Full Time Equivalents (FTEs) to target  noncompliance by small business and self-employed taxpayers by hiring  field examination and collection, automated collection and service center- based compliance staff;    $65 million and 260 FTEs for additional criminal investigation resources to  combat corporate fraud, increase tax enforcement, and enhance criminal  investigation capabilities by hiring additional criminal investigators and  special agents to focus on corporate financial fraud, general tax  enforcement, improve forensic electronic evidence capabilities and  increase special agent support staff;    $36 million and 207 FTEs to combat corporate abusive tax shelters by  devoting more resources to reviewing offshore transactions;    $15.5 million and 175 FTEs to increase individual taxpayer compliance by  focusing on the full spectrum of individual taxpayer noncompliance,  including nonfilers, nonpayers of tax owed, and more tax assessments on  underreported income; and    $15.1 million and 144 FTEs to combat diversions of charitable assets and  stop abusive transactions in the tax-exempt area by focusing on terrorism  funding and civil fraud by charities, and targeting tax avoidance strategies  by charities.
IRS is proposing to spend $373 million to maintain current operations,  which would cover increased costs of continuing current operations. The  increased costs include $133 million for salary increases assumed in IRS’s  budget. IRS’s 2005 budget assumes a federal salary increase of 1.5 percent.  If the actual federal salary increase is higher than 1.5 percent, IRS will  have to cover the unbudgeted portion of the increase.
For 2005, IRS has identified $110.8 million in savings to be generated from  process and system improvements. Key savings initiatives include:    $34.0 million and 408 FTEs from a reorganization of the information  systems function that will consolidate three parallel organizations, and  reduce staff, to improve operations and support to IRS customers;    $15.7 million and 220 FTEs from consolidating insolvency and  exam/collection field support from over 80 to 5 or fewer locations;    $14.9 million and 167 FTEs from the termination of transition employees  who could not be placed when offices closed and jobs were shifted when  IRS reorganized into business units; and    $5.1 million and 130 FTEs due to more electronic filing.
In addition to the savings, IRS has identified $149.7 million in program  reductions to help fund its 2005 spending priorities. The reductions  include $102.7 million due to reductions in the scope of certain BSM  projects (discussed later in more detail) and $18 million in overhead  reductions.
section_title: Recent History Suggests Increasing Enforcement Staffing May Be Difficult
paragraphs: In its last five budget requests, IRS has asked for more enforcement staff,  to be funded partly by budget increases and partly through internal  savings. Despite budget requests that were almost fully funded and despite  achieving some savings, the number of skilled enforcement staff actually  declined. The budget increases and savings were consumed by other  priorities including unbudgeted expenses.
subsections: section_title: IRS’s Recent Budget Requests Were Almost Fully Funded, and Some Savings Were Achieved
paragraphs: Table 1 shows that IRS has received almost 98 percent or more of its  budget requests since fiscal year 2002.
Table 2 shows that in 2003 IRS realized about 34 percent of its anticipated  budget savings and about 41 percent of its anticipated staff savings. In  2004, IRS officials believe they did a better job in both estimating and  tracking the savings and estimate they will be able to reinvest 77 percent  of the anticipated budget savings and 53 percent of the anticipated staff  savings.
IRS should be commended for identifying saving and reinvestment  opportunities in its budget request. While IRS has been unable to achieve  its savings targets, we recognize that budget preparation begins about 18  months before the beginning of the fiscal year, making it difficult to  accurately predict future savings. IRS officials believe they are doing a  better job both estimating and tracking savings. Nevertheless, IRS’s history  raises questions about its ability to achieve the 2005 savings targets.
section_title: IRS Has Been Unable to Achieve Increases In Enforcement Staffing in Recent Years
paragraphs: Despite budget requests that were almost fully funded, and despite  realizing some savings, IRS has been unable to achieve the enforcement  staffing increases projected in its recent budgets.
As shown in figure 1, the number of revenue agents (those who audit  complex returns), revenue officers, (those who do field collection work),  and special agents (those who performed criminal investigations) has  decreased over 21 percent between 1998 and 2003.
The Large- and Mid-size Business (LMSB) operating division, responsible  for combating abusive corporate tax shelters and assuring that large  businesses are in compliance with the tax laws, is an example of these  staffing trends. According to LMSB officials, at the beginning of fiscal year  2002, they had 5,047 revenue agents on board. This was reduced to 4,431 at  the beginning of fiscal year 2004—a 12 percent reduction—due to attrition  and the inability to hire.
The declines in enforcement staff have been associated with declines in  enforcement efforts. For example, audit rates are below the levels of the  mid-1990s, even after accounting for recent increases. Figure 2 shows the  trend in total audits of individual taxpayers since 1993. Total audits  includes both face-to-face audits and less complex correspondence audits.  IRS and GAO have reported that IRS has experienced steep declines in  audit rates since 1996, although the audit rate has slowly increased since  2000.
The link between the decline in enforcement staff and the decline in  enforcement actions, such as audit rates, is complicated by other factors,  such as changes over time in the mix of complex and simple enforcement  actions. However, IRS officials have stated that the decline in enforcement  staff has restricted their enforcement efforts. For example, LMSB officials  stated that they hired about 200 fewer revenue agents than planned in  fiscal year 2003 and expect to hire about 95 fewer in fiscal year 2004  because of budget constraints. They estimated that had this hiring  occurred as planned, LMSB could have examined an additional 505 returns  and 1,877 returns in fiscal years 2003 and 2004 respectively. In addition,  the 2005 budget request attributes the decline in enforcement actions to  the decline in enforcement staff.
The impact of the recent declines in enforcement staffing and enforcement  actions on taxpayers’ rate of voluntary compliance is not known. This  leaves open the question of whether these declines are eroding taxpayers’  incentives to voluntarily comply. As we have reported, the IRS’s National  Research Program (NRP), which is developing new estimates of taxpayer  compliance, is underway. These estimates will be the first based on data  more recent than 1988, when IRS last measured voluntary compliance.
According to IRS officials the new estimates should be available in 2005.  Until the NRP estimates are available, IRS lacks current data on  compliance including changes in taxpayers’ compliance rate.
NRP is important for several reasons beyond measuring compliance. It is  intended to help IRS better target its enforcement actions, such as audits,  on non-compliant taxpayers, and minimize audits of compliant taxpayers.  It could also help IRS better understand the impact of taxpayer service on  compliance.
section_title: Other IRS Priorities Have Consumed Recent Budget Increases and Savings
paragraphs: Priorities other than enforcement, including unbudgeted expenses and  taxpayer service, have consumed IRS’s budget increases and savings over  the last few years. Unbudgeted expenses include unfunded portions of the  annual pay increases, that can be substantial given IRS’s large workforce,  and other costs, such as postage increases and higher-than- budgeted rent  increases. According to IRS officials, these unbudgeted expenses  accounted for    $154 million of IRS’s budget in 2002;    $311 million of IRS’s budget in 2003; and    $169 million of IRS’s budget in 2004.
IRS officials also told us that they anticipate having to cover unbudgeted  expenses in 2005. As of March 2004, they were projecting unbudgeted  salary increases for fiscal year 2005 of at least $100 million. This projection  could change since the actual federal salary increase for 2005 has not been  finalized.
Another reason for the reduction in enforcement staff has been IRS’s  emphasis on improving service to taxpayers. According to IRS officials,  much of this improvement has been at the expense of additional resources  for enforcement and has resulted in less hiring of new staff for  enforcement activities.
section_title: IRS’s Information Technology Budget Includes Funding For BSM and Information Systems
paragraphs: IRS is requesting about $1.93 billion (including 7,385 staff years) in  information technology (IT) resources for fiscal year 2005. This includes  (1) $285 million for the agency’s multiyear capital account that funds  contractor costs for the Business Systems Modernization (BSM) program  and (2) about $1.64 billion for information systems, of which $1.55 billion  (including 7,137 staff years) are for operations and maintenance. BSM is  important for IRS’s future because it has the potential for long-term  efficiency gains without major increases in staffing or other resources.
subsections: section_title: Fiscal Year 2005 BSM Request Developed Consistent with Federal Guidance
paragraphs: Consistent with the Clinger-Cohen Act of 1996 and the Government  Performance and Results Act of 1993, OMB guidance on budget  preparation and submission require that, before requesting multiyear  funding for capital asset acquisitions, agencies develop sufficient  justification for these investments. The guidance requires that agencies  implement key IT management practices, including an integrated IT  architecture and a process for managing information systems projects as  investments. In addition, agencies are to prepare business cases that  reasonably demonstrate how proposed investments support agency  missions and operations, and provide positive business value in terms of  expected costs, benefits, and risks.
Beginning in 1995, when IRS was involved in an earlier attempt to  modernize its tax processing systems, and continuing since then, we have  made recommendations that IRS implement fundamental modernization  management capabilities before acquiring new systems. We  recommended, among other things, that IRS (1) put in place an enterprise  architecture (modernization blueprint) to guide and constrain its business  system investments, and (2) implement disciplined processes for  investment decision management and system development management.
In response to our recommendations, IRS developed and is using an  enterprise architecture, which describes IRS’s current and target business  and technology environments, and the associated high-level transition  strategy that identifies and conceptually justifies needed investments to  guide the agency’s transition over many years from its current to its target  architectural state. In addition, IRS also implemented a capital planning  and investment control process for developing business cases and  managing BSM projects as part of an investment portfolio, as well as a  systems life cycle management methodology, which IRS refers to as the  enterprise life cycle.
IRS’s $285 million request for the BSM account for fiscal year 2005 is  based on its enterprise architecture as well as its related investment  management process and life cycle management methodology. IRS’s BSM  budget request constitutes a reduction of greater than 25 percent from the  planned fiscal year 2004 spending level of $388 million, and reflects the  agency’s decision, in light of ongoing project delays, to focus on a smaller  modernization project portfolio in an effort to better ensure cost targets  are maintained, project schedules are met, and the promised projects are  delivered.
section_title: BSM Management Controls Improved, But Weaknesses Remain
paragraphs: Pursuant to statute, funds from the BSM account are not available for  obligation until IRS submits to the congressional appropriations  committees for approval an expenditure plan that meets certain  conditions. In January 2004, IRS submitted an expenditure plan seeking  approval to obligate funds from the BSM account for its planned fiscal  year 2004 projects and program-level initiatives. IRS’s fiscal year 2004 plan  reported the deployment of modernization projects during fiscal year 2003  that have benefited taxpayers and the agency, including an application that  provides refund status for the advanced child tax credit and the first  release of a new human resources system, HR Connect, which has now  been delivered to 73,000 IRS employees.
In our briefing to the staff of the relevant appropriations subcommittees  on the results of our review of the fiscal year 2004 expenditure plan, we  reported that IRS has made progress in implementing our prior  recommendations to improve its modernization management controls and  capabilities. However, certain of these controls and capabilities related to  configuration management, human capital management, cost and schedule  estimating, and contract management have not yet been fully implemented  or institutionalized. Our analysis has shown that weaknesses in these  controls and capabilities have contributed, at least in part, to cost and  schedule shortfalls experienced by most BSM projects. In the absence of  appropriate management controls, systems modernization projects will  likely be hampered by additional costs and schedule shortfalls. The  reasons are twofold: the tasks associated with those projects that are  moving beyond design and into development are, by their nature, more  complex and risky. Also, the fiscal year 2004 expenditure plan supports  progress toward the later, more complex phases of key projects as well as  continued development of other projects.
section_title: BSM Projects Continue to Incur Cost Increases and Schedule Delays
paragraphs: Based on IRS’s expenditure plans, BSM projects have consistently cost  more and taken longer to complete than originally estimated. In its fiscal  year 2004 plan, IRS disclosed that key BSM projects have continued to  experience cost and schedule shortfalls against prior commitments. Table  4 shows the life cycle variance in cost and schedule estimates for  completed and ongoing BSM projects. These variances are based on a  comparison of IRS’s initial and revised cost and schedule estimates to  complete initial operation or full deployment of the projects. We did not  independently validate planned projects’ cost estimates or confirm,  through system and project management documentation, the validity of  IRS-provided information on the projects’ content and progress.
As the table indicates, the cost and schedule estimates for full deployment  of the e-Services project have increased by just over $86 million and 18  months, respectively, which included a significant expansion from the  initial project scope. In addition, the estimated cost for the full deployment  of Customer Account Data Engine (CADE) Release 1 has increased by  almost $37 million, and project completion has been delayed by 30  months. In addition to the modernization management control  shortcomings discussed above, our work has shown that the increases and  delays were caused, in part, by  inadequate definitions of systems requirements. As a result, additional  requirements have been incorporated into ongoing projects. increases in project scope. For example, the e-Services project has  changed significantly since the original design. The scope was broadened  by IRS to provide additional benefits to internal and external customers.   underestimating project complexity. This factor has contributed directly to  the significant delays in the CADE release 1 schedule.    competing demands of projects for test facilities. Testing infrastructure  capacity is insufficient to accommodate multiple projects when testing  schedules overlap.   project interdependencies. Delays with one project have had a cascading  effect and have caused delays in related projects.
These cost overruns and schedule delays impair IRS’s ability to make  appropriate decisions about investing in new projects, delay delivery of  benefits to taxpayers, and postpone resolution of material weaknesses  affecting other program areas.
Producing reliable estimates of expected costs and schedules is essential  to determining a project’s cost-effectiveness. In addition, it is critical for  budgeting, management, and oversight. Without this information, the  likelihood of poor investment decisions is increased.
Schedule slippages delay the provision of modernized systems’ direct  benefits to the public. For example, as table 4 shows, slippages in CADE  will delay IRS’s ability to provide faster refunds and respond to taxpayer  inquiries on a timely basis.
Delays in the delivery of modernized systems also affect the remediation  of material internal management weaknesses. For example, the Custodial  Accounting Project is intended to address a material weakness in IRS’s  financial reporting process and provide a mechanism for tracking and  summarizing individual taxpayer transactions. This release has yet to be  implemented, and a revised schedule has not yet been determined. In  addition, the Integrated Financial System is intended to address financial  management reporting weaknesses. When IRS submitted its fiscal year  2003 BSM expenditure plan, Release 1 of the Integrated Financial System  was scheduled for delivery on October 1, 2003. However, it has yet to be  implemented, and additional cost increases are expected.
section_title: IRS Is Acting to Resolve Issues Identified in Recent BSM Assessments
paragraphs: Given the continued cost overruns and schedule delays experienced by  these BSM projects, IRS and the prime systems integration support  (PRIME) contractor, Computer Sciences Corporation (CSC), initiated and  recently completed several in-depth and more comprehensive assessments  of BSM. These assessments revealed several significant weaknesses that  have driven project cost overruns and schedule delays and also provided a  number of recommendations for IRS and CSC to address the identified  weaknesses and reduce the risk to BSM. The deficiencies identified are  consistent with our prior findings. IRS developed a BSM action plan to  address the findings and recommendations resulting from these  assessments. IRS expects to complete implementation of its actions by the  end of the calendar year. Because of the significant risks associated with  the findings of these various assessments, continued monitoring by IRS  and validation of the effectiveness of corrective actions is critical to  reducing the likelihood of additional cost overruns and schedule delays.
It will be important for IRS to continue its efforts to balance the scope and  pace of the program with the agency’s capacity to handle the workload,  and to institutionalize the management processes and controls necessary  to resolve the deficiencies identified by our reviews and the recent  program assessments. Meeting these challenges and improving  performance are essential if IRS and the PRIME contractor are to  successfully deliver the BSM program.
section_title: Continued Efforts Needed to Strengthen Information Systems Budget Request Development Process
paragraphs: The Paperwork Reduction Act (PRA) requires federal agencies to be  accountable for their IT investments and responsible for maximizing the  value and managing the risks of their major information systems  initiatives. The Clinger-Cohen Act of 1996 establishes a more definitive  framework for implementing the PRA’s requirements for IT investment  management. It requires federal agencies to focus more on the results they  have achieved and introduces more rigor and structure into how agencies  are to select and manage IT projects.
Leading private- and public-sector organizations have taken a project- or  system-centric approach to managing not only new investments but also  operations and maintenance of existing systems. As such, these  organizations  identify operations and maintenance projects and systems for inclusion in  budget requests;    assess these projects or systems on the basis of expected costs, benefits  and risks to the organization;    analyze these projects as a portfolio of competing funding options; and    use this information to develop and support budget requests.
This focus on projects, their outcomes, and risks as the basic elements of  analysis and decision-making is incorporated in the IT investment  management approach that is recommended by OMB and GAO. By using  these proven investment management approaches for budget formulation,  agencies have a systematic method, on the basis of risk and return on  investment, to justify what are typically very substantial information  systems operations and maintenance budget requests.
In our assessment of IRS’s fiscal year 2003 budget request, we reported  that the agency did not develop its information systems operations and  maintenance request in accordance with the investment management  approach used by leading organizations. We recommended that IRS  prepare its future budget requests in accordance with these best  practices. To address our recommendation, IRS agreed to take the  following actions:    develop an activity-based cost model to plan, project, and report costs for  business tasks/activities funded by the information systems budget;    develop a capital planning guide to implement processes for capital  planning and investment control, budget formulation and execution,  business case development, and project prioritization; and  implement a process for managing all information systems investments as  a portfolio, patterned after the BSM program.
IRS has made progress in implementing investment management best  practices in developing and supporting its information systems budget  request. IRS officials reported that the agency is managing all information  systems funding requirements as a portfolio within Treasury’s IT  investment portfolio system, and preparing business cases for many of its  operational program activities, as required by OMB. According to IRS,  these business cases are updated on a periodic basis and are evaluated  within the context of the agency’s overall IT funding portfolio. IRS plans to  align this portfolio management process with the capital planning and  investment control system now being implemented to provide a uniform  process to select, manage, and control all IT investments, including  modernization, enhancements, and sustaining operations.
Although progress has been made, IRS has not yet completed all of its  planned actions to implement our prior recommendation. Completion of  IRS’s capital planning and investment control guide has been delayed due  to changing roles and responsibilities within the Modernization and  Information Technology Services organization, and thus was not used in  preparing the fiscal year 2005 information systems budget request.  According to IRS, the capital planning guidance will not be completed  until September 2004. In addition, as of March 2004, IRS has not yet  developed an activity-based cost accounting system to enable it to account  for the full cost of operations and maintenance projects and determine  how effectively IRS projects are achieving program goals and mission  needs. This cost model, which is being developed in conjunction with the  Integrated Financial System modernization project, has been delayed, and  due to Integrated Financial System schedule delays, will not be available  until the fiscal year 2008 budget formulation cycle. Until IRS implements  the capital planning and investment control guidance and the activity- based cost model and incorporates them into the preparation of its  information systems budget request, the agency will not be able to ensure  that the information systems operations and maintenance request is  adequately supported.
section_title: Interim Results Of IRS’s 2004 Filing Season Show Improvement Except In Telephone Accuracy
paragraphs: IRS’s filing season performance through mid-March has improved in most  areas compared to recent years, based on data we reviewed on five key  filing season activities—paper and electronic processing, telephone  assistance, IRS’s Web site, and walk-in assistance. However, the accuracy  of tax law answers provided by IRS telephone staff declined. Although we  cannot quantify the connection between these improvements and IRS’s  actions, they appear to represent a payoff from IRS’s modernization and an  increased emphasis on service since the IRS Restructuring and Reform Act  of 1998.
Table 5 summarizes IRS’s filing season performance so far this year  compared to recent years. The following sections will address IRS’s  specific performance in key areas.
subsections: section_title: IRS’s Processing Operations Have Gone Smoothly, and Electronic Filing Continues to Grow, But Not at Rate to Meet 2007 Goal
paragraphs: According to IRS officials, tax industry representatives and data reviewed,  the 2004 filing season is progressing smoothly (meaning without  disruptions in IRS computer systems used in processing that would have a  negative impact on taxpayers) and IRS is either meeting or exceeding its  goals for the number of days to process an individual income tax returns,  depending on the type of return. As table 5 shows, through March 19, 2004,  IRS has processed about 63 million individual tax returns—of which 43  million were received electronically, which is about 4.4 million more  electronically filed returns than this time last year. IRS officials have  attributed this year’s performance, in part, to having planned appropriately  for issues such as correcting errors related to the advanced child tax  credit. Through March 12, 2004, IRS had identified about 2.7 million  individual tax returns with errors, with approximately 1.6 million related  to the advanced child tax credit.
Electronic filing has grown from the same time last year. It has also grown  by about 250 percent overall—from about 15 million returns in 1996 to  about 53 million in 2003. Although electronic filing continues to grow, IRS  is not on track to reach the long-term electronic filing goal of 80 percent  by 2007 set by Congress in the IRS Restructuring and Reform Act of 1998.  IRS officials recognize that they will not achieve the goal of having 80  percent of all individual income tax returns filed electronically by 2007.  However, IRS officials told us they will continue to strive to achieve that  goal in the future. Moreover, as we reported last year, the growth rate  from 1996 through 2003 has been generally decreasing, with the 13 percent  growth rate in 2003 representing the smallest percentage increase in the  number of individual tax returns filed electronically since 1996. Although  the current growth rate is about 11 percent, according to IRS data, the  number of electronic filings is ahead of estimates at this time.  Consequently, IRS officials believe IRS will meet and might exceed the  annual growth rate goal of 12 percent by the year’s end.
Growth in electronic filing remains a key part of IRS’s modernization  strategy. Electronic filing has allowed IRS to reduce resources devoted to  processing (discussed in appendix I) and begin consolidating paper  processing centers. It also reduces errors because IRS would not have to  transcribe tax returns information and some up-front checks are built into  electronic filing. Finally, taxpayers get refunds quicker with electronic  filing—IRS’s goal for refunds for electronically filed returns is about half  the 40 days that IRS allows for refunds for returns filed on paper.
IRS has implemented numerous initiatives over the years intended to  increase electronic filing usage. IRS’s new major electronic filing  initiatives this year are related to business not individual income tax  returns. They are modernized E-File, which allows the electronic filing of  corporate income tax form 1120 and E-Services, which is a suite of  Internet services offered to tax practitioners such as electronic account  resolution and transcript delivery. IRS officials do not expect these  initiatives to dramatically increase electronic filing of individual tax  returns this year, because taxpayers and practitioners will need to adjust  their behavior and take advantage of the new services. However, these  initiatives are important, because they should increase the willingness of  tax practitioners to file both corporate and individual tax returns  electronically in future filing seasons, which can currently be done only on  a limited basis for corporate returns.
IRS made some changes to improve the Free File Alliance program,  which began last year to promote electronic filing of individual income tax  returns. As of March 7, 2004, IRS had received almost 2.5 million free file  tax returns compared to 2.0 million for the same time last year—an  increase of 24 percent. One issue with the Free File program is that IRS  cannot determine how many of the Free File users are new electronic  filers. We plan to follow up on this issue as part of our annual filing season  report.
section_title: Telephone Access Improved Over Last Two Years, While Tax Law Accuracy Declined
paragraphs: Access to IRS’s toll-free telephone lines has improved over the last two  years, although account accuracy (the accuracy of answers to questions  from taxpayers about the status of their accounts) has stabilized and tax  law accuracy declined. As table 5 shows, as of March 13, 2004, IRS had  received 29 million telephone calls. The percentage of taxpayers that  attempted to reach an assistor and actually got through and received  service—referred to as the Customer Service Representative (CSR) level  of service—increased to 84 percent, which is 2 percentage points over the  same period last year and 22 percentage points over the same period in  2002. According to IRS officials, the gains in CSR level of service are  largely due to continued improvements resulting from increased  specialization, improved technology, and continued focus on maintaining  telephone staffing.
IRS estimates that accounts accuracy is essentially the same this year as  for the last two years at this time. As shown in table 5, taxpayers who  called about their accounts received correct information an estimated 89  percent of the time in 2004. IRS officials said that accounts accuracy rates  remained stable, because the accounts workload has remained relatively  stable.
At the same time, table 5 shows that IRS estimates that tax law accuracy  declined from 84 percent in 2002 and 82 percent last year to 76 percent so  this year. IRS officials said that tax law accuracy rates declined because  formatting changes made in 2003 to the guide CSRs use to help them  answer questions have not enhanced the usability as IRS anticipated.  According to IRS, although training was provided to the staff for the  changes to their assigned subjects, IRS underestimated the impact these  changes would have on overall quality. Also, IRS officials said they have  begun redesigning the CSRs’ guide and are continuing to conduct detailed  analysis of quality data to identify immediate opportunities to improve the  accuracy of service.
section_title: Web Site Usage is Increasing, But Concerns About Usability Still Exist
paragraphs: IRS’s Web site use has increased over the last 2 years as shown in table 6.  Also, an independent Web site rater reported that, for 7 of out 10 weeks of  the filing season, IRS’s Web Site has ranked in the top 10 out of 40 in a  government Web site index for time it took to download information.
Over the last 2 years, IRS has added two features to assist taxpayers,  which likely contributed to the increased usage of the IRS Web site. In  fiscal year 2003, IRS added the “Where’s My Refund?” and in 2004 added  “Remember Your Advanced Child Tax Credit” features. The “Where’s My  Refund?” feature enables taxpayers to access IRS’s Web site to determine  if IRS received their tax return, whether their refund was processed, and if  processed, when approximately to expect the refund. Table 5 shows that  as of March 20, 2004, the use of this feature was up by 53 percent from last  year, from about 9.3 million attempts to about 14.3 million. The  “Remember Your Advanced Child Tax Credit” enables a person to access  IRS’s Web site to determine the amount of the advanced child tax credit  they received. As of March 21, 2004, about 8.5 million accesses have been  made to the “Remember Your Child Tax Credit” feature.
Overall we found that IRS’s Web site continues to improve when it comes  to providing services to taxpayers. However, we continue to have  concerns about the forms and publication search function. We found that  the forms and publication search function still does not always make the  most pertinent information readily available. For example, when we typed,  “earned income tax credit” into the forms and publication search function,  Publication 596—the primary publication on the earned income tax  credit—was the 79th item on the list and we had to scroll through eight  pages to find it.
section_title: Use of IRS’s Walk-in Assistance Sites Continues to Decline
paragraphs: The number of taxpayers receiving assistance at IRS walk-in sites  continued to decline. At any one of IRS’s over 400 walk-in sites, taxpayers  get various types of assistance, including answers to tax law questions,  assistance with their accounts, and return preparation assistance  (generally for low income taxpayers).
The number of people who received assistance at an IRS walk-in site  declined by 11 percent compared to the same period last year. IRS  continues to restrict free tax preparation services to, for example,  taxpayers with an annual gross income level of $35,000 or less, because of  the labor intensive nature of that work and to enable staff to concentrate  on other services that only IRS can provide such as account assistance.  IRS reduced the number of staff available for return preparation by 20  percent from 2003. As the data in table 5 indicate, the number of returns  being prepared has decreased by about 36 percent over this time last year.  These trends are consistent with ones we have previously reported for  recent filing seasons.
Figure 4 shows a downward trend in the overall assistance provided and in  the return preparation at the walk-in sites.
Sites staffed by volunteers certified by IRS do not provide the range of  services IRS provides, such as account assistance, and operate primarily  during the filing season. IRS is promoting these as alternatives to its walk- in assistance sites for certain types of service. IRS works to ensure that  walk-in sites have a listing of services, hours, and locations of the  volunteer sites in their area. As of March 2004, there are approximate  11,600 volunteer sites. IRS also promotes its telephone operations and  Web site at its walk-in sites as well.
The quality of tax law assistance provided at IRS’s walk-in sites in 2004  was comparable to the same period last year. This conclusion is based on  TIGTA reviews through February 2004.
section_title: Concluding Observations
paragraphs: Congress has been supportive of IRS’s efforts to improve service to  taxpayers and increase enforcement staff and IRS has succeeded at the  former. However, despite budgets that were almost fully funded and  realizing savings through efficiency gains, IRS has not been able to  increase enforcement staff. In fact, staffing of key enforcement  occupations has declined. The declines in IRS’s enforcement staff and the  related declines in its enforcement efforts raise concerns that taxpayers’  incentives to voluntarily comply with their tax obligations could be  eroding.
Strengthening enforcement programs by increasing staffing while  providing a high level of taxpayer service will continue to be a challenge  for IRS. Unbudgeted costs are expected to compete for the funds IRS has  allocated in its 2005 budget request for new spending including the  enforcement initiatives. If, as has been the case in recent years, IRS fails to  realize all expected savings then the funds available for new spending  would be further reduced.
One option for increasing enforcement staff in the near-term is to  reconsider the level and types of service IRS provides to taxpayers.  Taxpayer services are much improved raising a question about the  appropriate balance to strike between investing in further service  improvements and enforcement. At the same time, the use of IRS’s walk-in  assistance sites is declining. The improvements in telephone service,  increased Web site use, and the availability of volunteer sites raise a  question about whether IRS should continue to operate as many walk-in  sites. Reconsidering the level and types of service is an option—but not a  recommendation—to be considered by IRS management and the  Congress.
The challenge of increasing IRS’s enforcement staff highlights the  importance of succeeding with NRP and BSM. NRP should, if completed  successfully, provide the first new data to estimate the voluntary  compliance rate since IRS last estimated the compliance rate using 1988  data. The new estimates could have implications for future IRS budgets. If  compliance rates are comparable to those estimated using 1988 data, the  pressure to increase IRS’ s enforcement staff would likely diminish. If,  however, compliance rates are down, the pressure to increase  enforcement staff and the pressure on IRS’s budget could increase.
BSM and related initiatives such as electronic filing hold the long-term  promise of efficiency gains that could allow IRS to improve both taxpayer  service and enforcement without significant budget increases. However,  cost overruns and schedule delays associated with on-going BSM projects,  along with planned reductions to the BSM project portfolio mean that  many of these benefits will not be realized in the short term. As we have  recommended, various management controls and capabilities need to be  fully implemented and institutionalized. Otherwise the projects will likely  encounter additional cost and schedule shortfalls.
section_title: Appendix I: How IRS Allocated Expenditures and Staff Resources in Fiscal Year 2003
paragraphs: In our review of IRS’s 2004 budget request, we provided figures showing  IRS’s expenditures and staff allocations in fiscal year 2002. Figures 5 and 6  illustrate how the Internal Revenue Service (IRS) allocated expenditures  and staff in fiscal year 2003.
Figure 5 shows that total expenditures increased from $10.4 billion in 2002  to $11.8 billion in 2003. While the division of expenditures across  categories has generally remained the same as 2002 allocations, equipment  increased from 4 to 6 percent of total expenditures from 2002 to 2003.
Figure 6 shows IRS’s total staff resources have decreased slightly from  99,180 in 2002 to 98,381 in 2003. IRS’s allocation of staffing resources  remained largely similar, but with a 1 percentage point decrease in the  percent of staff years processing tax returns. The boundaries between the  categories presented in these figures may not be well defined. For  example, staff categorized under providing management and other  services could also be considered under taxpayer service, processing, or  compliance. Therefore, the figures are meant to provide a summary of how  IRS uses its resources and should be interpreted with caution. However,  the 1 percentage point decrease in staff years devoted to processing tax  returns is important because it represents a cumulative payoff from  electronic filing and shows the potential for shifting IRS resources from  one area to another.