IRS 2015 Budget: Long-Term Strategy and Return on Investment Data Needed to Better Manage Budget Uncertainty and Set Priorities
Published: 2014-06-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The financing of the federal government depends largely upon the 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 2015, the President requested a $12.5 billion budget for IRS, a 10.5 percent increase over the fiscal year 2014 budget.
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 2015 budget request for IRS. (In April 2014, GAO reported interim information on IRS's budget.) Among other things, this report assesses IRS's (1) strategy to address budget cuts and (2) use of ROI analysis. To conduct this work, GAO reviewed the fiscal year 2015 budget justification, IRS and OMB budget guidance, and IRS workload and performance data from fiscal years 2009 to 2015. GAO also interviewed IRS officials and the National Taxpayer Advocate.
section_title: What GAO Found
paragraphs: Since fiscal year 2010, the Internal Revenue Service (IRS) budget has declined by about $900 million. As a result, funding is below fiscal year 2009 levels.
Staffing has also declined by about 10,000 full-time equivalents since fiscal year 2010, and performance has been uneven. For example, between fiscal years 2009 and 2013, the percentage of callers seeking live assistance and receiving it fluctuated between 61 percent and 74 percent. IRS took some steps to address budget cuts, such as reduced travel and training.
IRS's strategic plan does not address managing budget uncertainty, although there are several indicators that funding will be constrained for the foreseeable future. For example, in May 2014, the Office of Management and Budget (OMB) generally required a 2 percent reduction in agencies' fiscal year 2016 budget submission. OMB guidance also requires agencies to develop strategies for operating in an uncertain budget environment. According to IRS, extensive senior leadership turnover has contributed to the lack of a long-term strategy. Without a strategy, IRS may not be able to operate effectively and efficiently in an uncertain budget environment.
For fiscal year 2015, IRS calculated projected return on investment (ROI) for most of its enforcement initiatives. However, due to limitations—such as estimating the indirect effect coverage has on voluntary compliance—IRS does not calculate actual ROI or use it for resource decisions. These limitations are important, which is why GAO recommended in 2012 that IRS explore developing such estimates. Given that these limitations could take time to address, GAO demonstrated how IRS could use existing ROI data to review disparities across different enforcement programs to inform resource allocation decisions. Comparing projected and actual ROI is consistent with OMB guidance. While not the only factor in making resource decisions, actual ROI could provide useful insights on the productivity of a program.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS (1) develop a long-term strategy to manage uncertain budgets, and (2) calculate actual ROI for implemented initiatives, compare actual ROI to projected ROI, and use the data to inform resource decisions. IRS agreed with GAO's recommendations, noting that it initiated a review of its base budget to ensure resources are aligned with its strategic plan and ROI is one of several factors relevant to making resource allocation decisions.

section_title: Letter
paragraphs: The financing of the federal government depends largely upon the  Internal Revenue Service’s (IRS) ability to collect taxes, including  providing taxpayers with services to make voluntary compliance easier  and enforcing tax laws to ensure compliance with tax responsibilities. For  fiscal year 2015, the President requested $12.5 billion for IRS. This is an  increase of 10.5 percent ($1.2 billion) over the fiscal year 2014  appropriation. In April 2014, we reported that IRS has absorbed  approximately $900 million in budget cuts since fiscal year 2010. In that  interim report, we found the cuts resulted in significant staffing declines  and uneven performance. For example, we reported that IRS staffing has  been reduced by about 8,000 full-time equivalents (FTE) since fiscal year  2009. We also reported that while IRS provided a 67 percent level of  telephone services for fiscal year 2014 through March 15, 2014 compared  to 61 percent for the prior entire fiscal year, average wait times to reach a  telephone assistor had almost doubled since fiscal year 2009—from 8.8  minutes to 16.8 minutes as of mid-March 2014.
Because of the size of IRS’s budget and the importance of its service and  compliance programs for all taxpayers, you asked us to review the fiscal  year 2015 budget request for IRS. In this report we (1) assess IRS’s  strategy to address the budget cuts, including sequestration; (2) assess  any new use of return on investment (ROI) analysis; (3) summarize  requested funding and actual and planned spending for the Patient  Protection and Affordable Care Act (PPACA), and assess the updated  PPACA information technology (IT) cost estimate; and (4) describe IRS’s  progress in implementing open GAO budget-related recommendations  and list any GAO open matters for Congress and recommendations for  executive action that could result in potential savings or increased  revenue for IRS.
To conduct our work for all objectives, we reviewed key documents— such as the fiscal year 2015 congressional justification for IRS—and  interviewed IRS officials. For the first objective, we also analyzed IRS  data, including FTE and performance data for key IRS operations;  reviewed executive orders, and Office of Management and Budget (OMB)  guidance on improving government performance and efficiency; and  interviewed the National Taxpayer Advocate. For the second objective,  we reviewed IRS and OMB guidance, and interviewed officials from the  IRS Office of Corporate Budget and its Research, Analysis, and Statistics  (RAS) Division. For the third objective, we summarized PPACA  information by funding source since inception and analyzed new  information on actual and planned spending for fiscal year 2014. We  could not assess the updates to the PPACA cost estimate because the  updated September 2013 cost estimate is still under review. For the  fourth objective, we obtained information on our open recommendations  from various IRS officials and analyzed relevant documentation to  determine if the recommendations were implemented. We spoke with IRS  officials and reviewed data collection procedures and determined that the  data used in this report were sufficiently reliable for our purposes. For  further details on our scope and methodology, see appendix I.
We conducted this performance audit from November 2013 to June 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: IRS Budget Presentation
paragraphs: The congressional budget justification for IRS presents funding and FTE  information at two levels: (1) appropriation account and (2) budget  activity. In addition, it provides descriptions of program activities within  each budget activity. IRS has four appropriation accounts:
Enforcement. This account provides funding for the examination of  tax returns, both domestic and international; administrative and  judicial settlement of taxpayer appeals of examination findings;  technical rulings; monitoring of employee pension plans;  determination of qualifications of organizations seeking tax-exempt  status; examination of tax returns of exempt organizations;  enforcement of statutes relating to detection and investigation of  criminal violations of the internal revenue laws; identification of  underreporting of tax obligations; securing of unfiled tax returns; and  collecting unpaid accounts.
Operations Support. This account provides funding for overall  planning, direction, and support for the IRS, including shared service  support related to facilities services, rent payments, printing, postage,  and security. This appropriation funds headquarters policy and  management activities such as corporate support for strategic  planning; communications and liaison; finance; human resources;  equity, diversity and inclusion; research and statistics of income; and  necessary expenses for information systems and telecommunication  support, including development, security, and maintenance of IRS  information systems.
Taxpayer Services. This account provides funding for taxpayer  service activities and programs. This includes printing forms and  publications, processing tax returns and related documents, offering  filing and account services, ensuring the availability of taxpayer  assistance, and providing taxpayer advocacy services.
Business Systems Modernization. This account provides resources  for the planning and capital asset acquisition of IT to modernize the  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 18 program activities.
The congressional justification presents how budget resources could be  allocated to appropriation accounts. IRS is restricted from reprogramming  funds within appropriation accounts without committee approval if the  reprogramming will augment existing programs, projects, or activities  (PPA) in excess of $5 million or 10 percent, whichever is less. IRS refers  to its PPAs as “budget activities.”  IRS generally notifies Congress if it  expects to reprogram funds from one budget activity to another.   However, IRS is not restricted from shifting resources between program  activities, which are activities within a budget activity and not subject to  reprogramming restrictions.  Further, while IRS cannot transfer resources  from one appropriation account to another without specific statutory  authority to do so, IRS could shift resources between any of the 18  program activities within the Exam and Collection budget activity without  Congressional approval or notification.
Within the congressional justification, IRS also details its strategic goals  and objectives for the agency. According to the fiscal year 2015  congressional justification for IRS, the IRS strategic plan guides program  and budget decisions and supports the Department of the Treasury Fiscal  Year 2014 to 2017 Strategic Plan and the Agency Priority Goal of  expanding the availability and improving the quality of customer service  options.
The congressional justification also details information on requested  program increases (new program initiatives). The information includes  why the funds are needed, how they will be used, and the number of staff  by position needed to do the work. Some of the new program initiatives  also include projected return on investment (ROI) calculations—the  projected additional revenue collected, divided by the projected cost. For  IRS, projected ROI is an estimate of how the agency expects a program  initiative to perform. IRS defines three types of ROI:
Revenue producing. The initiative yields direct, measureable results  through enforcement activities.
Revenue protecting. The initiative prevents the issuance of  fraudulent refunds to persons posing as a taxpayer and resolves  issues prior to issuing a refund.
Revenue enhancing. The initiative leads to improved revenue  collection through improvements in case selection, issue identification,  and enforcement case treatment.
In recent years, some of the new program initiatives have been  predicated on a program integrity cap adjustment. Congress passes  these adjustments to allow additional funding above discretionary  spending limits for certain activities that are expected to generate benefits  that exceed cost. Of the 22 initiatives in the IRS fiscal year 2015 budget  request, 17 are predicated on a program integrity cap adjustment.
section_title: Implementation of Major New Laws
paragraphs: IRS continues to implement four major new laws passed in recent years:
PPACA. This law reforms the private insurance market and expands  health coverage to the uninsured. IRS is responsible for implementing  new provisions including new taxes, tax credits, and information  reporting requirements.
Merchant card reporting. This law requires payment settlement  entities (e.g., banks) to report fiscal year information and the gross  amount of reportable payment transactions (i.e., payment card and  third party network transactions) to IRS.
Cost basis reporting. This law requires investment brokers to report  the adjusted cost basis for certain publicly traded securities and  whether a gain or loss is short or long-term.
Foreign Account Tax Compliance Act (FATCA). This law adds  reporting and other requirements relating to income from assets held  abroad by: (1) requiring foreign financial and nonfinancial institutions  to withhold 30 percent of payments made to such institutions by U.S.  individuals, unless such institutions agree to disclose the identity of  such individuals and report on their bank transactions, and (2)  denying a tax deduction for interest on non-registered bonds issued  outside the United States.
section_title: IRS Has Taken Some Steps to Address Declining Budgets in the Short-Term, but Lacks a Long-Term Strategy
subsections: section_title: IRS Has Absorbed Substantial Budget Cuts in Recent Years
paragraphs: IRS’s appropriations have ranged from a low of $10.2 billion in fiscal year  2005 to a high of $12.1 billion in fiscal year 2010. The fiscal year 2010  high was in part a result of a program integrity cap adjustment of $890  million. As we have previously reported, IRS’s budget declined  approximately $900 million between fiscal years 2010 and 2014. These  cuts reduced IRS’s budget to below fiscal year 2009 funding levels. The  largest budget reduction ($618 million) occurred in fiscal year 2013  because of sequestration ($594 million) and a 0.2 percent rescission ($24  million). In fiscal year 2014, IRS’s budget remained essentially flat, with  an increase of $92 million for the improvement of identification and  prevention of refund fraud and identity theft, and international and  offshore compliance issues. For fiscal year 2015, the President  requested $12.5 billion for IRS, an increase of 10.5 percent ($1.2 billion)  over fiscal year 2014 appropriations. See figure 1.
Staffing declined by more than 10,000 FTEs between fiscal years 2010  and 2014, which reduced IRS’s total FTEs to below fiscal year 2009  levels. For fiscal year 2015, the President requested an increase of about  7,000 FTEs over fiscal year 2014, which would bring IRS above fiscal  year 2012 levels. See figure 2.
section_title: IRS Performance Declined in Some Areas
paragraphs: Amidst these budget reductions, IRS’s performance has declined in  Enforcement and Taxpayer Services. IRS officials anticipate continued  declines in fiscal year 2015. As shown in figure 3, IRS lowered its return  examination and collection coverage targets. For example, the original  audit coverage target for individual examinations was 1 percent for fiscal  year 2014, but was lowered to 0.8 percent in the fiscal year 2015  congressional justification.
IRS’s performance in assisting taxpayers has also suffered, including  telephone and correspondence services. Between fiscal years 2009 and  2013, telephone level of service—the percentage of callers seeking live  assistance and receiving it—fluctuated between 61 percent and 74  percent. As of April 19, 2014, after the filing season ended, fiscal year  2014 telephone level of service was 67 percent. In addition, the average  amount of time a taxpayer had to wait to talk to a telephone assistor  increased since fiscal year 2009—from 8.8 minutes to 17.0 minutes, as of  April 19, 2014. Moreover, from fiscal years 2009 through 2013, overage  correspondence—paper correspondence to which IRS has not responded  within 45 days of receipt—increased from 25 percent to 47 percent.  However, according to IRS, the 2014 filing season was relatively smooth,  which IRS attributes to reduced call volume and fewer tax law changes.
IRS attributes performance declines to sequestration and furloughs. For  example, the number of individual, high-income, and business return  audits fell from fiscal year 2012 to 2013 because fewer staff were  available to conduct audits. Similarly, reports by the IRS Oversight Board  and the National Taxpayer Advocate (NTA) attribute performance  declines in part to reduced funding.
section_title: IRS Faces an Increased Demand for Some Services
paragraphs: As staffing fell, IRS’s workload increased in some areas as a result of  statutory mandates and priority programs. For fiscal year 2014, IRS  allocated 9 percent of its FTEs to these mandates and programs,  including those to implement four new laws—PPACA, merchant card  reporting, cost basis reporting, and FATCA. In addition, because  instances of identity theft are more frequent, IRS has significantly  increased resources devoted to refund fraud, which includes identity theft.
Since IRS began tracking refund fraud in fiscal year 2011, it has more  than quadrupled the numbers of FTEs allocated to refund fraud, from  1,018 in fiscal year 2011 to 4,146 FTEs in fiscal year 2014 (about 5  percent of its total workforce). Table 1 shows the shift in FTEs to  legislative mandates and priority programs.
section_title: IRS Has Taken Some Steps to Address Budget Cuts
paragraphs: To reduce spending to address sequestration and other budget cuts, IRS  has taken steps that include the following key efforts:
Staff attrition and furloughs. IRS absorbed the majority of its budget  cuts through staff attrition and furloughs. Of the $567 million in  savings realized in fiscal year 2013, $311 million resulted from  attrition, hiring freezes, and furloughs. IRS implemented an exception- only hiring freeze in December 2010. In fiscal year 2013 alone, FTEs  decreased by more than 2.7 percent—2,978—from fiscal year 2012  as a result of attrition, according to IRS. Of these savings, IRS  generated $88.5 million from 3 furlough days.
Reduced travel and training. IRS substantially reduced employee  training and related travel. Since fiscal year 2010, IRS reduced  training costs by 83 percent and training-related travel costs by 87  percent by limiting employee travel and training to mission-critical  projects. From fiscal years 2009 through 2013, IRS reduced the  amount it spent per employee on training from $1,600 to $200,  according to data provided by IRS. Reductions of this magnitude are  not sustainable, according to IRS officials. For fiscal year 2013, IRS  reported a savings of $56.2 million by reducing agency-wide, non- technical training and non-case related travel. IRS attributes the  savings to a greater use of technology and deferral of some standard  training. IRS noted that in fiscal year 2013 the training budget was cut  so the funds would be available to minimize furlough days and  thereby maintain service to taxpayers.
E-file savings. It costs IRS much less to process electronic returns  than paper returns. IRS reported receiving 3.5 million fewer paper  returns in fiscal year 2013 and 4.2 million more electronically filed  returns, compared to fiscal year 2012. According to the fiscal year  2015 congressional justification, IRS realized savings of $11 million  and 209 FTEs in fiscal year 2013 as a result of these changes, which  exceeded projected savings by $2.4 million and 32 FTEs.
Space reduction. IRS reported it completed 89 projects in fiscal year  2013 to reduce the amount of physical space it uses. As a result, IRS  will rent 557,779 fewer square feet, which will save $15.7 million in  rent annually. Further, IRS approved 30 more such projects in fiscal  year 2014, which IRS estimates will reduce its space needs by  another 350,000 square feet, producing an additional savings of about  $11.3 million annually.
In addition, to address budget cuts, IRS has taken steps that it anticipates  will produce savings in fiscal years 2014 and 2015.
Telephone and walk-in services. In fiscal year 2014, IRS reduced or  eliminated certain telephone and walk-in services. These actions are  consistent with our finding in December 2012 that IRS needed to  dramatically revise its strategy for providing telephone and  correspondence services, and that incremental efficiency gains would  not be enough to reverse service declines. Specifically, IRS  limited telephone assistance to only basic tax law questions during  the filing season and reassigned assistors to work account-related  inquiries;  launched the “Get Transcript” tool, which allows taxpayers to  obtain a viewable and printable transcript on www.irs.gov, and  redirected taxpayers to automated tools for additional guidance;  redirected refund-related inquiries to automated services and did  not answer refund inquiries until 21 days after a tax return was  filed electronically or 6 weeks after a return was filed by paper  (unless the automated service directed the taxpayer to contact  IRS);  limited access to the Practitioner Priority Services line to only  those practitioners working tax account issues;  limited live assistance and redirected requests for domestic  employer identification numbers to IRS’s online tool; and eliminated free return preparation and reduced other services at  IRS’s walk-in sites.
IT reductions. In part because of a lack of funding, IRS put a hold on  aspects of two major IT projects:  Information Reporting and Document Matching (IRDM). This  program is intended to improve business taxpayer compliance by  matching business information returns (e.g., Form 1099-K) with  individual tax returns to detect potential income underreporting.  According to IRS IT officials, during the hold IRS will determine  the best case management tool to use to meet IRDM’s program  requirements. IRS plans to leverage an off-the-shelf solution,  which IRS believes will be more cost effective than building one.
Return Review Program (RRP). When fully deployed, RRP is  expected to make use of leading-edge technology to detect,  resolve, and prevent fraud. IRS expects to complete a plan to  move beyond the hold on RRP in the summer of 2014. Officials  said the plan will help inform IRS’s funding needs for RRP.
section_title: IRS Has No Long-Term Strategy to Address an Uncertain Budget Environment
paragraphs: IRS does not outline a framework for how it should operate in an  uncertain budget environment in either its fiscal year 2009 through 2013  strategic plan or its fiscal year 2014 goals and objectives included in the  fiscal year 2015 congressional justification for IRS. While IRS has taken  steps in the short-term to address budget cuts (including sequestration)— such as exception-only hiring and reducing or eliminating some telephone  and walk-in services—it does not have a strategy to operate in an  uncertain budget environment over the long-term.
Further, we found that IRS absorbed the majority of cuts as a result of  actions that were not part of a long-term strategy. According to officials  from IRS’s Office of Corporate Budget, IRS has absorbed the majority of  cuts through attrition and, as a result, the programs that experienced the  most attrition were the programs that absorbed the most cuts. In fiscal  years 2012 through 2013, IRS absorbed roughly $516 million through  attrition, nearly $383 million from enforcement activities, according to data  provided by IRS. Officials also noted IRS has taken large budget cuts  over the last several years. As IRS continues to operate in an uncertain  budget environment, it continues to examine and prioritize what it can cut  and what it can postpone. According to the NTA, the budget cuts have  caused IRS to operate in crisis mode—reacting to external changes and  putting out fires. The NTA also stated that IRS has no overall, cohesive  strategy to understand what kind of services it should be providing and  when to eliminate a service.
In response to our questions about IRS’s lack of a long-term strategy,  officials noted that one key problem has been the extensive turnover in  senior leadership across the agency. Nineteen of 46 members—over 40  percent—of IRS’s Senior Executive Team were on-board on or after  October 1, 2013, including the new IRS Commissioner, who took office in  December 2013. However, IRS began an extensive review of its base  budget in April 2014 in order to collect detailed spending and  performance information for each of its distinct programs. Once IRS  completes this review, management plans to determine the proper  funding levels for each program and how to realign existing resources.
While this is an important start, it may not be sufficient over the long term.  There are a number of indications that funding is unlikely to soon return to  the growing and high budget levels IRS experienced in fiscal years 2010  and 2011. First, our work on the nation’s long-term fiscal outlook shows  that growth in spending for federal health care and retirement programs  will place increasing pressure on discretionary spending. Second, in  May 2014, OMB generally required a 2 percent reduction in agencies’  fiscal year 2016 budget submission. Third, under the Budget Control Act  of 2011 (BCA), sequestration of discretionary appropriations could occur  in any fiscal year through 2021. In addition, as shown in figure 4, for the  past several fiscal years IRS has been appropriated less than it  requested, with a difference of 13 percent in fiscal year 2014. Looking  back over a 10-year horizon provides further evidence that funding levels  provided in fiscal years 2010 and 2011 were an exception and that the  recent decline might be viewed more as a return to normal. All of these  factors indicate that it is increasingly important for agencies to have long- term plans to address uncertain budget environments.
In addition, according to Executive Order No. 13576 and OMB guidance,  agencies are to develop strategies for operating effectively and efficiently  in an uncertain budget environment. We have previously reported on  steps that agencies can take to do this. These include reexamining  programs, related processes, and organizational structures to determine  whether they are effectively or efficiently achieving their mission. They  also include streamlining or consolidating management or operational  processes and functions to make them more cost effective. We have  also made recommendations to IRS on how it can more strategically  manage operations in specific areas, such as developing a long-term  strategy to improve its online services.
A long-term strategy that includes a fundamental reexamination of IRS’s  operations, programs, and organizational structure could help it operate  more effectively and efficiently in an environment of budget uncertainty.  Although IRS has taken steps in the short term, they may not be sufficient  to stem performance declines. While IRS was able to mitigate some of  the effects of sequestration, it is unlikely that the steps taken are  sustainable strategies in the long term. Moreover, the extent of turnover in  senior leadership makes it even more important to have a long-term  guiding strategy.
section_title: IRS Does Not Use Return on Investment Data to Evaluate the Performance of Revenue Initiatives or to Inform Enforcement Resource Allocation Decisions
subsections: section_title: IRS Calculates a Projected, but Not Actual, ROI for Most New Enforcement Initiatives
paragraphs: IRS calculates a projected return on investment (ROI)—the projected  revenue divided by the projected cost—for most proposed new  enforcement initiatives cited in the congressional justification. In the  calculation, revenue represents the expected direct revenue effects of the  initiatives, but does not reflect any indirect revenue effects that may result  if the added enforcement activities increase voluntary compliance among  taxpayers. Cost includes all enforcement-related resources used by IRS,  but does not incorporate compliance costs imposed on taxpayers.
For fiscal year 2015, IRS proposed 13 enforcement initiatives (see table  2). IRS estimated a projected ROI for 8 of the initiatives. In addition, 11  initiatives are predicated on funding from a program integrity cap  adjustment. IRS calculates ROI over a 3-year period (based on  projections of associated costs and expected revenue) because it expects  that staff working on the initiative will reach their full performance after 3  years.
section_title: IRS Does Not Calculate an Actual ROI Once Initiatives Are Implemented
paragraphs: As of May 2014, IRS has not determined the extent to which the  resources actually devoted to enforcement initiatives differ from the 3- year projections of resources described in prior budget justifications. Nor  has IRS computed actual rates of return on the resources that were  actually used for specific initiatives. As a result, neither IRS nor others  know whether the program initiatives it proposed, once implemented,  were as productive as expected. We have reported that calculating actual  ROI would be a significant step forward in determining how initiatives are  performing and whether calculations for projected ROIs need to be  adjusted. IRS, following a recommendation from the Treasury Inspector  General for Tax Administration, is conducting a feasibility study to identify  the necessary steps and challenges that exist to measure actual revenue  for enforcement initiatives. IRS expects to complete the study in  December 2014.
IRS officials noted that one reason they do not calculate actual ROI for  enforcement initiatives is because it is difficult to determine which staff  have actually worked on a particular initiative over a multi-year period.  According to IRS officials, IRS creates exam plans each year based on  division goals and priority areas, which can change on an annual basis.  As such, staff may be initially hired to work on a specific initiative, but may  work on another initiative the following year. According to IRS officials,  different individuals may work on an initiative during the course of a year,  rather than specific individuals being dedicated to the initiative 100  percent of the time. When staff initially hired to work on an initiative are  transferred to another initiative, there can be significant differences  between the scope of the proposed and implemented versions of the  initiative. In our prior work, we noted that if IRS falls behind on its hiring  plans, staff may not reach their full potential as quickly as anticipated,  which ultimately could delay projected revenue gains.
In addition, officials from the IRS Corporate Budget Office cited difficulties  in tracking ROI-related information on funded initiatives, because of  difficulties in matching information between IRS systems for formulating  and executing its budget. IRS has established funded program codes  (previously known as internal order codes) as a mechanism to track  specific initiatives—such as IRDM and merchant card/cost basis  reporting—which could provide actual ROI, but IRS mainly uses these  codes to track information that is of interest to congressional staff.
Comparing projected ROI to actual ROI is consistent with project  management concepts, internal control standards, OMB guidance, and  our prior work on performance management. In addition, budget  decision makers in Congress have stated that a comparison of projected  ROI to actual ROI initiatives would be useful information to have. Until  IRS calculates actual ROI for its implemented enforcement initiatives, it is  not accountable for the ROI it projected when requesting funding.
section_title: IRS Calculates Actual ROI for Its Broad Enforcement Programs, but Does Not Use It to Inform Resource Decisions
paragraphs: In June 2009, we recommended that IRS calculate actual ROI because it  provides information about how programs and initiatives are performing  and the possible need to adjust ROI methodologies to more effectively  project results of future proposed initiatives. We have recognized that  calculating actual ROI is challenging and existing data may not be  complete.
Based on our prior recommendation, IRS began reporting actual ROI in  the fiscal year 2014 congressional justification for the following three  major enforcement programs:
Examination. This program conducts examinations of tax returns of  individual taxpayers, businesses, and other types of organizations to  verify that the tax reported is correct.
Collection. This program collects delinquent taxes and secures  delinquent tax returns through the appropriate use of enforcement  tools such as liens, levies, seizures of assets, installment agreements,  offers in compromise, substitute for returns, and 26 U.S.C.  § 6020(b),  which allows the IRS to prepare returns if a taxpayer fails to file a  return.
Automated Underreporter. This program matches taxpayer  information returns against data reported on individual tax returns and  verifies the information to identify any discrepancies.
According to IRS officials, IRS calculates the actual ROI for these  programs because total enforcement revenue collected is allocated to  these three categories. IRS reports the actual ROI in the congressional  justification, based on our previous recommendation and congressional  budget decision makers’ interest in this information. However, IRS does  not use this actual ROI information for resource allocation decisions  because the data do not reflect marginal ROI, nor do they include the  indirect effects of IRS enforcement activities on voluntary compliance.  Moreover, because of the time required to work enforcement cases to  completion, the costs associated with assessing and collecting additional  revenues may be spread over more than one fiscal year and are not  necessarily aligned with revenue collections that may occur in  subsequent years. These limitations are critical concerns, which is why  we recommended in 2012 that IRS develop estimates of marginal direct  revenue and marginal direct costs within each enforcement program. We  further recommended that IRS explore the potential of estimating the  marginal influence of enforcement activity on voluntary compliance.  However, given that these data gaps could take considerable time to fill,  we also demonstrated how IRS planners could in the meantime review  actual (average) ROI across different enforcement programs and across  different groups of cases within these programs to better inform resource  allocation decisions. As we noted, the planners could consider this  information in combination with their professional judgment relating to  other relevant but currently unquantifiable factors. In fact, while limited in  scope, we demonstrated how a hypothetical shift in resources could  potentially increase direct revenue by $1 billion annually, without  significant negative effects on voluntary compliance.
The development of data relating to marginal ROI would also enable IRS  to improve its projections of ROI for enforcement initiatives, particularly  those that expand coverage for specific taxpayer categories. IRS  currently knows little about the extent to which marginal yields differ from  average yields within specific return categories; consequently, it does not  know the extent to which its ROI projections, which are based on average  yields, may be overstated. By collecting the data needed to compute  actual ROI for expanded coverage enforcement initiatives, IRS would be  able to determine whether marginal returns are significantly lower than  average returns; thereby, IRS would have better information for deciding  whether the expanded coverage should be maintained, cut back, or  expanded further in future years. Actual productivity information and  better ROI projections can also help budget decision makers in  determining funding levels for IRS.
section_title: Since Inception, IRS Has Spent $859 Million to Implement PPACA, but an Updated IT Cost Estimate Is Unavailable for Review
paragraphs: When enacted, PPACA gave IRS responsibility for implementing a  number of provisions. From fiscal year 2010 through 2012 and again in  2014, IRS received funds for PPACA implementation activities from the  Department of Health and Human Services Health Insurance Reform  Implementation Fund (HIRIF), which is used to fund the federal  administrative expenses to implement PPACA. To implement PPACA  provisions in fiscal years 2013 and 2014, IRS requested $360.5 million  and $439.6 million, respectively, but it did not receive this funding. As we  previously reported, of the $12.5 billion IRS requested for fiscal year  2015, $451.7 million is to implement PPACA. Table 4 shows the  amounts IRS obligated for PPACA implementation from fiscal years 2010  to 2014.
For fiscal year 2014, IRS identified seven initiatives related to PPACA  implementation. Table 5 shows how much IRS plans to spend on these  initiatives in fiscal year 2014 and the amount spent through the middle of  fiscal year 2014. Of the total planned spending for fiscal year 2014— $400.6 million—IRS has obligated $87.1 million through March 31, 2014.
Table 6 shows how much IRS requested to implement PPACA initiatives  in fiscal year 2015.
As of December 2012, IRS estimated the full life-cycle costs for PPACA  to be $1.89 billion from fiscal years 2010 through 2026. According to IRS  officials, an update to the December 2012 PPACA cost estimate was  completed in September 2013. The updated cost estimate is still under  review and it will not be released until January 2015. As a result, we  cannot assess the progress made on implementing our prior  recommendations.
In September 2013, we reported that IRS made progress in updating its  initial October 2010 PPACA cost estimate, in accordance with best  practices as identified in the GAO Cost Estimating and Assessment  Guide. However, we found that IRS could take further steps to improve  the estimate’s accuracy and credibility. At that time, IRS agreed with the  majority of the actions we recommended. IRS officials reported that the  September 2013 PPACA cost estimate does address some of the  recommended actions. For example, IRS officials said they implemented  our recommendation to document how cost drivers are selected for future  sensitivity analyses. However, until the September 2013 cost estimate is  available for our review, we cannot verify these changes.
section_title: IRS Implemented Three of Seven Prior Recommendations
paragraphs: Since September 2013, IRS at least partially implemented three  recommendations made in our prior reviews of its budget justification  documents. Two of the implemented recommendations resulted in more  transparent reporting and greater accessibility to IT investments data.  Table 7 summarizes the recommendations implemented by IRS.
Four budget-related recommendations to IRS remain open. As shown in  table 8, IRS is planning to implement two of the open recommendations,  but only partially agrees with the two remaining open recommendations.  Appendix II identifies all of our products with open matters for Congress  and recommendations to IRS regarding tax administration that could  result in potential savings or increased revenues.
section_title: Conclusion
paragraphs: IRS is operating in an uncertain budget environment, and there are  implications that significant funding increases are unlikely in the  foreseeable future. While IRS has taken steps in recent years to reduce  spending, those steps were generally reactionary. Now is the time to  fundamentally reexamine its operations, programs, and organizational  structure to determine how to most efficiently and effectively accomplish  its mission. Creating such a roadmap will help ensure that IRS effectively  provides taxpayers with services to make voluntary compliance easier  and to enforce the tax laws, so that taxpayers fulfill their tax  responsibilities. A roadmap will also help provide continuity in light of any  future turnover among senior executives.
As IRS examines its operations, it will need multiple sources of data on  which to base its assessment and to ultimately make resource allocation  decisions. While not necessarily the only factor in making resource  allocation decisions, actual ROI could provide insight on the productivity  of a program and inform estimating techniques for new initiatives. In turn,  better estimates of ROI and actual productivity information can help  budget decision makers in determining funding levels for IRS. Comparing  projected and actual ROIs can help hold managers and the IRS  accountable for the funding received.
section_title: Recommendations for Executive Action
paragraphs: We recommend the Commissioner of Internal Revenue take the following  three actions:  As a result of turnover in IRS’s Senior Executive Team and in order to  enhance budget planning and improve decision making and  accountability, we recommend IRS 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 (1) reexamining  programs, related processes, and organizational structures to  determine whether they are effectively and efficiently achieving the  IRS mission, and (2) streamlining or consolidating management or  operational processes and functions to make them more cost- effective.
Because ROI provides insights on the productivity of a program and is  one important factor in making resource allocation decisions, we  recommend IRS  calculate actual ROI for implemented initiatives, compare the actual  ROI to projected ROI, and provide the comparison to budget decision  makers for initiatives where IRS allocated resources; and use actual ROI calculations as part of resource allocation decisions.
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 III,  IRS agreed with our recommendations.  Regarding our recommendation  to develop a long-term strategy to address operations amidst an uncertain  budget environment, IRS noted that it is conducting a review of its budget  base to ensure resources are aligned with IRS Strategic Goals,  Objectives, and Priorities, and will adjust its fiscal year 2015 budget as a  result of this review.  Regarding our ROI recommendations, IRS agreed  that ROI is one of several factors relevant to making resource allocation  decisions.  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.  We agree that  projected benefits are based on estimates, but it is possible to develop an  estimate for what would have occurred in the absence of the initiative.  Moreover, this report emphasizes comparisons between projected and  actual ROI, not comparing actual results with what would have occurred  in the absence of an initiative.  Comparing projected and actual ROI is  important to assist budget decision makers in determining funding levels  for IRS and to hold managers and the IRS accountable for the funding  received.  IRS also provided technical comments on our draft report,  which we incorporated as appropriate.
We plan to send copies of this report to the Chairman and Ranking  Members of other Senate and House committees and subcommittees that  have appropriation, authorization, and oversight responsibilities for IRS.  We are also sending copies to the Commissioner of Internal Revenue, the  Secretary of the Treasury, and the Chairman of the IRS Oversight Board.  The report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff has any questions about this report, please contact us  at (202) 512-9110 or mctiguej@gao.gov. Contact points for our offices of  Congressional Relations and Public Affairs are on the last page of this  report. GAO staff members who made major contributions to this report  are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We were asked to review the President’s fiscal year 2015 budget request  for the Internal Revenue Service (IRS). The objectives of this report were  to (1) assess IRS’s strategy to address the budget cuts, including  sequestration; (2) assess any new use of return on investment (ROI)  analysis; (3) summarize requested funding and actual and planned  spending for the Patient Protection and Affordable Care Act (PPACA)  and assess the updated PPACA information technology cost estimate;  and (4) describe IRS’s progress in implementing open GAO budget- related recommendations and list any GAO open matters for Congress  and recommendations for executive action that could result in potential  savings or increased revenue for IRS.
To assess IRS’s strategy to address the budget cuts, including  sequestration, we summarized IRS’s budget, staffing, performance, and  workload trends for fiscal years 2009 through 2015. We selected fiscal  year 2009 as a starting point because fiscal year 2009 was the year prior  to IRS’s highest appropriation in recent years. To summarize these  trends, we analyzed congressional justifications for IRS for fiscal years  2009 through 2015 and performance data for key IRS operations. When  we describe full-time equivalent (FTE) trends, the actual number of FTEs  represents total number of hours worked (or to be worked) divided by the  number of compensable hours applicable to each fiscal year, according to  definition provided by IRS. Enacted FTEs represents the number of FTEs  provided for the enacted budget. Requested FTEs represents the number  of FTEs requested in the President’s Budget for IRS.
We also analyzed FTE and workload trends on IRS identified priority  programs, which include new statutory mandates. We reviewed reports  by the IRS Oversight Board, Treasury Inspector General for Taxpayer  Administration (TIGTA), and the National Taxpayer Advocate (NTA),  which provided some possible reasons for performance declines. In  addition, we analyzed proposed program initiatives in the fiscal year 2015  congressional justification and determined which ones were predicated on  a program integrity cap adjustment, which Congress passes to allow  additional funding above discretionary spending limits. We also analyzed  steps IRS has taken to address budget cuts, including sequestration. To  analyze these steps, we reviewed the fiscal year 2015 congressional  justification, including information on savings initiatives realized or  proposed from fiscal years 2009 through 2015 and prior GAO work on  sequestration. We also interviewed IRS officials in IRS offices of  Corporate Budget and Information Technology and the NTA. We  compared IRS efforts to address uncertain budgets to Executive Order  13576 “Delivering an Efficient, Effective, and Accountable Government”  and Office of Management and Budget (OMB) guidance. In addition, we  compared IRS efforts to leading practices in government performance  and efficiency.
To assess any new use of ROI analysis, we reviewed the fiscal year 2015  congressional justification to identify IRS’s projected and actual ROI;  obtained data from IRS to determine the new initiatives by projected  revenue, cost, and type; and summarized projected ROI by type for new  enforcement initiatives and actual ROI for IRS’s three enforcement  programs—Examination, Collection, and Automated Underreporter. As  part of our analysis of proposed program initiatives, we also identified any  new enforcement initiative predicated on a program integrity cap  adjustment. We reviewed OMB and IRS guidance on new program  initiatives and interviewed IRS Corporate Budget officials to determine  how IRS calculates ROI for proposed initiatives and the extent to which it  compares estimated ROI to actual ROI for funded new initiatives. We  reviewed prior GAO and TIGTA reports to identify criteria for measuring  actual revenue of new program initiatives and for use in resource  allocation decisions. We also interviewed IRS Research, Analysis, and  Statistics officials to discuss the IRS feasibility study on ROI calculations  and challenges in calculating actual ROI for new enforcement initiatives,  as well as current enforcement programs.
To provide funding and spending information on PPACA, we summarized  data by appropriation account since program inception (fiscal year 2010)  and analyzed new information on actual and planned spending for fiscal  year 2014, based on congressional budget justifications for IRS and on  spending plans. We could not assess the most recent update of the  PPACA cost estimate—September 2013—because it is still under  review. However, to determine IRS’s progress in updating its cost  estimate (consistent with our recommendation in 2013 to follow best  practices identified in the GAO Cost Estimating and Assessment Guide)  we interviewed and obtained some documentation from IRS officials.
To describe IRS’s progress in implementing our prior budget-related  recommendations, we obtained information from various IRS officials and  reviewed relevant documentation, including the fiscal year 2015  congressional budget justification and the IRS Joint Audit Management  Enterprise System reports, which track IRS actions taken to implement  GAO recommendations. We then determined which recommendations  were implemented. We also searched the GAO Engagement Reporting  System to identify prior GAO open matters for Congress and  recommendations for executive action. We then identified whether the  recommendation or matter could result in a potential savings, increased  revenue, or indirect financial benefits for IRS.
We interviewed IRS officials and determined that the data presented in  this report were sufficiently reliable for our purposes. We conducted our  work in Washington, D.C., where key IRS officials involved with the  budget are located.
We conducted this performance audit from November 2013 to June 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Products with Open Matters for Congress and Recommendations to the Internal Revenue Service (IRS)
paragraphs: Appendix II: GAO Products with Open Matters  for Congress and Recommendations to the  Internal Revenue Service (IRS)
In the 37 GAO products listed below, as of March 13, 2014, there are 10  open matters for Congress and 72 open recommendations to IRS. Of  these matters and recommendations, 20 increase revenue, 15 increase  savings, 10 increase both savings and revenue, and 37 have indirect  financial benefits.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Libby Mixon, Assistant Director,  Jehan Chase, Pawnee A. Davis, Mary Evans, Charles Fox, Suzanne  Heimbach, Carol Henn, Felicia Lopez, Paul Middleton, Ed Nannenhorn,  Sabine Paul, Mark Ryan, Erinn L. Sauer, Cynthia Saunders, Tamara  Stenzel, and Jim Wozny made major contributions to this report.