Internal Revenue Service: Assessment of Fiscal Year 2006 Budget Request and Interim Results of the 2005 Filing Season
Published: 2005-04-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service (IRS) has been shifting its priorities from taxpayer service to enforcement and its management of Business Systems Modernization (BSM) from contractors to IRS staff. Although there are sound reasons for these adjustments, they also involve risks. With respect to the fiscal year 2006 budget request, GAO assessed (1) how IRS proposes to balance its resources between taxpayer service and enforcement programs and the potential impact on taxpayers, (2) the status of IRS's efforts to develop and implement the BSM program, and (3) the progress IRS has made in implementing best practices in developing its Information Technology (IT) operations and maintenance budget. For the 2005 filing season, GAO assessed IRS's performance in processing returns and providing taxpayer service.
section_title: What GAO Found
paragraphs: IRS's fiscal year 2006 budget request of $10.9 billion proposes increased funding for enforcement, but reduced funding for taxpayer service and BSM. However, the potential impact of these changes on taxpayers in either the short- or long-term is unclear, because IRS has not provided details of proposed taxpayer service reductions, and although it is developing longterm goals, they are not yet finalized. Because of the proposed reductions and new and improved taxpayer services in recent years, this is an opportune time to examine the menu of services IRS provides. It may be possible to maintain the overall level of service to taxpayers by offsetting reductions in some areas with new and improved service in other areas. Taxpayers and IRS are seeing some payoff from the BSM program, with the deployment of initial phases of several modernized systems in 2004. Nevertheless, the BSM program continues to be high-risk, in part, because projects have incurred significant cost increases and schedule delays and the program faces major challenges in areas such as human capital and requirements management. As a result of budget reductions and other factors, IRS has made major adjustments. It is too early to tell what effect these adjustments will have on the program, but they are not without risk and could potentially impact future budgets. Further, the BSM program is based on strategies developed years ago, which, coupled with the delays and changes brought on by budget reductions, indicates that it is time for IRS to revisit its long-term goals, strategy, and plans for BSM. Because of these challenges, IRS is redefining and refocusing the BSM program. IRS has generally maintained or improved its filing season performance in 2005. Processing is more efficient, the accuracy of answers provided by telephone assistors is improved, and telephone access is relatively comparable to last year. This is particularly noteworthy, because IRS received less funding for taxpayer service in 2005 than it spent in 2004. Because the filing season is not over, the full impact on taxpayers and IRS operations is not yet known. However, there are indications of slippage in telephone access such as more abandoned calls and longer wait times.

section_title: Letter
paragraphs: We are pleased to participate in the Subcommittee’s hearing on the Internal  Revenue Service’s (IRS) fiscal year 2006 budget request and performance  during the 2005 tax filing season.
IRS is in the midst of making significant adjustments to its modernization  strategy to better serve taxpayers and ensure their compliance with the  nation’s tax laws.  It is now seven years since the passage of the Internal  Revenue Service Restructuring and Reform Act of 1998 (RRA 98) and IRS  is shifting its priorities from improving taxpayer service to strengthening  tax law enforcement efforts.   IRS is also adjusting its strategy for managing  its Business Systems Modernization (BSM) effort by shifting significant  program management responsibilities from contractor to IRS staff.   Although there are sound reasons for these adjustments, they also involve  risk.
We have reported that IRS has made progress improving taxpayer service  since the passage of RRA 98.  For example, IRS’s telephone assistance is  now more accessible and accurate.  Further, IRS is more efficient at  processing tax returns, in part, because of the growth of electronic filing,  and has cut processing staff.  IRS has also implemented some modernized  information systems and increased its capacity to manage large systems  acquisition and development programs.
However, progress has not been uniform. We have reported on large and  pervasive declines in IRS’s tax law enforcement programs after 1998.  We  have also reported that a number of systems modernization projects were  over budget and behind schedule.
As noted, IRS is shifting its priorities to better address these problems.  The  risk, as IRS shifts its priorities towards enforcement, is that some of the  gains in the quality of taxpayer service could be surrendered.  There are  analogous risks associated with moving more of the management of BSM  in-house.
With these risks in mind, our statement discusses both IRS’s fiscal year  2006 budget request and 2005 filing season performance to date.  To  address your request, we assessed (1) how IRS proposes to balance its  resources between taxpayer service and enforcement programs and the  potential impact on taxpayers, (2) the status of IRS’s efforts to develop and  implement the BSM program, and (3) the progress IRS has made in  implementing best practices for developing its information technology (IT)  operations and maintenance budget.  With respect to the interim results of  key 2005 filing season activities, we compared IRS’s performance to past  years’ and goals it set for this year.
Our assessment of the budget request and BSM is based on a comparative  analysis of IRS’s fiscal year 2002 through 2006 budget requests, funding,  expenditures, other documentation, and interviews with IRS officials.  Our  assessment of the interim results of the filing season is based on comparing  IRS’s performance this year to previous filing seasons, viewing operations  at a processing center, call sites, and walk-in sites, monitoring various  production meetings, interviewing IRS and Treasury Inspector General for  Tax Administration (TIGTA) officials and paid tax practitioners and other  external stakeholders, reviewing TIGTA and other external reports, and  reviewing IRS’s Web site.  For both assessments, we used historical budget  and performance data from reports and budget requests used by IRS,  Department of Treasury, and Office of Management and Budget (OMB).  In  past work, we assessed IRS’s budget and performance data. Since the data  sources and procedures for producing this year’s budget and performance  data have not significantly changed from prior years, we determined that  the budget data and filing season performance data were sufficiently  reliable for the purposes of this report.  The budget and performance data  for fiscal years 2005 and 2006 are subject to change. Regarding our analysis  of IRS’s BSM program, we primarily used the agency’s BSM expenditure  plans to determine the status of the program.  To assess the reliability of  the cost and schedule information contained in these plans, we interviewed  applicable IRS officials to gain an understanding of the data and discuss  our use of that data. In addition, we checked that information in the plans  was consistent with information contained in IRS internal briefings.   Accordingly, we determined that the data in the plans were sufficiently  reliable for purposes of this statement. We performed our work in  Washington, D.C. and Atlanta, Georgia from December 2004 through March  2005, in accordance with generally accepted government auditing  standards.
In summary, our assessment shows that:  IRS’s 2006 fiscal year budget request reflects a continuing shift in  priorities from improving taxpayer service to strengthening  enforcement efforts, but the potential impact of these changes on  taxpayers in both the short- and long-term is unclear.  IRS is requesting  $10.9 billion, an increase of 3.7 percent over fiscal year 2005 enacted  levels.  This includes an 8 percent increase for enforcement, and a 1  percent and 2 percent decrease for taxpayer service and BSM,  respectively.  IRS has not finalized the details on where reductions in  taxpayer service would occur.  In addition, IRS is developing, but  currently lacks, long-term goals that can help IRS inform stakeholders,  including the Congress, and aid them in assessing performance and  making budget decisions. In light of the current budget environment and  IRS’s improvements in taxpayer service over the last several years, this  is an opportune time to reconsider the menu of services it provides. It  may be possible to maintain the overall level of assistance to taxpayers  by changing the menu of services offered, offsetting reductions in some  areas with new and improved service in other areas.
IRS has taken important steps forward towards implementing the BSM  program by delivering the initial phases of several modernized systems  in 2004 and early 2005. Nevertheless, BSM continues to be high risk  because, in part, its projects have incurred significant cost increases and  schedule delays, and the program continues to face major challenges. As  a result of funding reductions and other factors, IRS has made major  adjustments to the BSM program, including reducing the management  reserve and changing the mix and roles of contractor versus federal staff  used to manage the program. It is too early to tell what effect these  adjustments will ultimately have on the BSM program, but they are not  without risk, could potentially impact future budget requests, and will  delay the implementation of certain functionality that was intended to  provide benefit to IRS operations and taxpayers. Finally, the BSM  program is based on visions and strategies developed years ago, which,  coupled with the already significant delays the program has experienced  and the changes brought on by the budget reductions, indicates that it is  time for IRS to revisit its long-term goals, strategy, and plans for BSM,  including an assessment of when significant future BSM functionality  would be delivered. According to the Associate Chief Information  Officer (CIO) for BSM, IRS is redefining and refocusing this program.
IRS has made progress toward implementing investment management  best practices that would improve its budget development and support  for its IT operations and maintenance funding requests. For example,  the recent release of a new accounting system included an activity- based cost module, which IRS considered to be a necessary action to  implement these best practices. However, Office of the Chief Financial  Officer officials stated that IRS needs 3 years of actual costs to have the  historical data necessary to provide a basis for future budget estimates.  Accordingly, they expect that IRS will begin using the activity-based cost  module in formulating the fiscal year 2008 budget and will have the  requisite 3 years of historical data in time to develop the fiscal year 2010  budget.
Our assessment of the 2005 filing season to date shows that:  IRS has generally maintained or improved its 2005 filing season  performance compared to last year.  Electronic filing continues to  increase, allowing IRS to continue reducing resources devoted to  processing.  However, IRS may not meet this year’s electronic filing goal  and is likely to not to meet its goal of 80 percent of all individual tax  returns filed electronically by 2007.  Access to telephone assistors  remains relatively comparable to last year, although there are other  indications of slippage in telephone access such as more abandoned  calls and longer wait times.  The tax law accuracy rate for answers  provided via telephone or IRS’s Web site has improved.  IRS’s  performance so far in 2005 is good news, considering IRS received  $104 million less in fiscal year 2005 than 2004 for taxpayer services.  IRS  plans to absorb this reduction, in part, by consolidating paper-  processing operations, shifting resources from service to enforcement,  and reducing some services—for example, reducing access to telephone  assistors—in 2005. However, the filing season is not over, and whether  or not IRS will achieve efficiency increases and the impact on IRS  operations and taxpayers is not yet known.
subsections: section_title: IRS’s Budget Request Continues to Shift Priority from Taxpayer Service to Enforcement, but the Short- and Long-term Impacts on Taxpayers Are Unclear
paragraphs: IRS’s fiscal year 2006 budget request reflects a continuing shift in priorities  by proposing reductions in taxpayer service and increases in enforcement  activities.  The request does not provide details about how the reductions  will impact taxpayers in the short-term.  Nor does IRS have long-term goals;  thus the contribution of the fiscal year 2006 budget request to achieving  IRS’s mission in the long-term is unclear.    Because of budget constraints  and the progress IRS has made improving the quality of taxpayer services,  this is an opportune time to reconsider the menu of services IRS offers.
subsections: section_title: IRS Is Proposing Reductions in Taxpayer Service and BSM and Increases in Enforcement
paragraphs: IRS is requesting $10.9 billion, which includes just over a 1 percent  decrease for taxpayer service, a 2 percent decrease for BSM, and nearly an  8 percent increase for enforcement, as shown in table 1.  As table 1 further  shows, the changes proposed in the 2006 budget request continue a trend  from 2004.  In comparison to the fiscal year 2004 enacted budget, the 2006  budget request proposes almost 4 percent less for service, almost 49  percent less for BSM, and nearly 14 percent more for enforcement.
As table 1 also shows, taxpayer service sustained a reduction of $104  million or 2.8 percent between fiscal years 2004 and 2005.  According to IRS  officials, the majority of this reduction was the result of consolidating  paper-processing operations, shifting resources from service to  enforcement, and reducing some services.  IRS officials said that this  reduction is not expected to adversely impact the services they provide to  taxpayers but added that the agency cannot continue to absorb reductions  in taxpayer service without beginning to compromise some services.
For fiscal years 2005 and 2006, table 2 shows some details of changes in  both dollars and full-time equivalents (FTE). Both are shown because  funding changes do not translate into proportional changes in FTEs due to  cost increases for salaries, rent, and other items.  For example, the $39  million or 1.1 percent reduction in taxpayer service translates into a  reduction of 1,385 FTEs or 3.6 percent.  Similarly, the over $500 million or  7.8 percent increase in enforcement spending translates into an increase of  1,961 FTEs or 3.4 percent.
The difference between changes in dollars and FTEs could be even larger  because of unbudgeted expenses.  Unbudgeted expenses have consumed  some of IRS’s budget increases and internal savings increases over the last  few years.  Unbudgeted expenses include unfunded portions of annual  salary increases, which can be substantial given IRS’s large workforce, and  other costs such as higher-than-budgeted rent increases.  According to IRS  officials, these unbudgeted expenses accounted for over $150 million in  each of the last 4 years.
An IRS official also told us they anticipate having to cover unbudgeted  expenses in 2006.  As of March 2005, IRS officials were projecting  unbudgeted salary increases of at least $40 million.  This projection could  change since potential federal salary increases for 2006 have not been  determined.
subsections: section_title: IRS Is Proposing $39 Million Less for Taxpayer Service, but the Impact on Taxpayers Is Unclear
paragraphs: The budget request provides some detail on how IRS plans to absorb cost  increases in the taxpayer service budget.  IRS is proposing a gross  reduction of over $134 million in taxpayer service from reexamining the  budget’s base and plans to use more than $95 million of it to cover annual  increases such as salaries.  This leaves a net reduction of nearly $39 million  or 1.1 percent in the taxpayer service budget.  The extent to which IRS is  able to achieve the gross reductions will impact its ability to use the funds  as anticipated.
Decisions on how the $134 million gross reduction would be absorbed were  not finalized prior to releasing the budget.  According to IRS officials, some  of the reductions would result from efficiency gains such as reducing  printing and postage costs; however, others would result from reductions  in the services provided to taxpayers such as shortening the hours of toll- free telephone service operations.  The officials also said most decisions  have now been made about general areas for reduction and most changes  will not be readily apparent to taxpayers.
Although IRS has made general decisions about the reductions, many of the  details have yet to be determined.  Therefore, the extent of the impact on  taxpayers in the short term is unclear.  For example, IRS plans to reduce  dependence on field assistance, including walk-in sites, but has not reached  a final decision on how to reduce services. Table 3 provides further detail  on how IRS is proposing to reduce funding and resources for taxpayer  service.
IRS’s fiscal year 2006 budget request is the sixth consecutive year the  agency has requested additional staffing for enforcement. However, up  until last year, IRS was unable to increase enforcement staffing;  unbudgeted costs and other priorities consumed the budget increase.
IRS’s proposal for fiscal year 2006, if implemented as planned, would return  enforcement staffing in these occupations to their highest levels since 1999.   Of the more than $500 million increase requested for 2006, about $265  million would fund enforcement initiatives, over $182 million would be  used in part for salary increases, and over $55 million is a proposal to  transfer funding authority from the Department of Justice’s Interagency  Crime and Drug Enforcement. The $500 million increase would be  supplemented by internal enforcement savings of $88 million.  As is the  case with taxpayer service savings, the extent to which IRS achieves  enforcement savings will affect its ability to fund the new enforcement  initiatives.
The $265 million for new enforcement initiatives consist of:  $149.7 million and 920 FTEs to attack corrosive non-compliance activity  driving the tax gap such as abusive trusts and shelters, including  offshore credit cards and organized tax resistance;  $51.8 million and 236 FTEs to detect and deter corrosive corporate non- compliance to attack complex abusive tax avoidance transactions on a  global basis and challenge those who promote their use;  $37.9 million and 417 FTEs to increase individual taxpayer compliance  by identifying and implementing actions to address non-compliance  with filing requirements; increasing Automated Underreporter  resources to address the reporting compliance tax gap; increasing audit  coverage; and expanding collection work in walk-in sites;  $14.5 million and 77 FTEs to combat abusive transactions by entities  with special tax status by initiating examinations more promptly,  safeguarding compliant customers from unscrupulous promoters, and  increasing vigilance to ensure that the assets of tax-exempt  organizations are put to their intended tax-preferred purpose and not  misdirected to fund terrorism or for private gain; and  $10.8 million and 22 FTEs to curtail fraudulent refund crimes.
The $88 million in internal savings would be reinvested to perform the  following activities:  $66.7 million and 585 FTEs to devote resources to front-line   $14.9 million and 156 FTEs to, in part, address bankruptcy-related   $6.7 million and 52 FTEs to address complex, high-risk issues such as  compliance among tax professionals.
In the past, IRS has had trouble achieving enforcement staffing increases  because other priorities, including unbudgeted expenses, have absorbed  additional funds.  IRS achieved some gains in 2004 and expects modest  gains in 2005.  Figure 1 shows that the number of revenue agents (those  who audit complex returns), revenue officers (those who do field  collection work), and special agents (those who perform criminal  investigations) decreased over 21 percent between 1998 and 2003, but  increased almost 6 percent from 2003 to 2004.
IRS’s recent gains in enforcement staffing are encouraging, as tax law  enforcement continues to remain an area of high risk for the federal  government because the resources IRS has dedicated to enforcing the tax  laws have declined, while IRS’s enforcement workload—measured by the  number of taxpayer returns filed—has continually increased.  Figure 2  shows the trend in field, correspondence, and total audit rates since 1995.   Field audits involve face-to-face audits and correspondence audits are  typically less complex involving communication through notices.  IRS  experienced steep declines in audit rates from 1995 to 1999, but the audit  rate—the proportion of tax returns that IRS audits each year—has slowly  increased since 2000.  The figure shows that the increase in total audit rates  of individual filers has been driven mostly by correspondence audits, while  more complex field audits, continue to decline.
The link between the decline in enforcement staff and the decline in  enforcement actions, such as audits, is complicated, and the real impact on  taxpayers’ rate of voluntary compliance is not known.  This leaves open the  question of whether the declines in IRS’s enforcement programs are  eroding taxpayers’ incentives to voluntarily comply.  IRS’s National  Research Program (NRP) recently completed a study on compliance by  individual tax filers based on tax data provided on 2001 tax returns.  The  study estimated that the tax gap—the difference between what taxpayers  owe and what they pay—is at least $312 billion per year as of 2001 and  could be as large as $353 billion.  This study 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 should also help IRS better  understand the impact of taxpayer service on compliance.
section_title: IRS Is Developing Long- term Goals That Can Be Used to Assess Performance and Make Budget Decisions
paragraphs: IRS is developing but currently lacks long-term goals that can be used to  assess performance and make budget decisions.  Long-term goals and  results measurement are a component of the statutory strategic planning  and management framework that the Congress adopted in the Government  Performance and Results Act of 1993.  As a part of this comprehensive  framework, long-term goals that are linked to annual performance  measures can help guide agencies when considering organizational  changes and making resource decisions.
A recent Program Assessment Rating Tool (PART) review conducted by  OMB reported that IRS lacks long-term goals.  As a result, IRS has been  working to identify and establish long-term goals for all aspects of its  operations for over a year.  IRS officials said these goals will be finalized  and provided publicly as an update to the agency’s strategic plan before  May 2005.
For IRS and its stakeholders, such as the Congress, long-term goals can be  used to assess performance and progress towards these goals, and  determine whether budget decisions contribute to achieving those goals.
Without long-term goals, the Congress and other stakeholders are  hampered in evaluating whether IRS is making satisfactory long-term  progress.  Further, without such goals, the extent to which IRS’s 2006  budget request would help IRS achieve its mission over the long-term is  unclear.
section_title: This Is an Opportune Time to Review IRS’s Menu of Taxpayer Services
paragraphs: For at least two reasons, this is an opportune time to review the menu of  taxpayer services that IRS provides.  First, IRS’s budget for taxpayer  services was reduced in 2005 and an additional reduction is proposed for  2006.  As already discussed, these reductions have forced IRS to propose  scaling back some services.  Second, as we have reported, IRS has made  significant progress in improving the quality of its taxpayer services.  For  example, IRS now provides many Internet services that did not exist a few  years ago and has noticeably improved the quality of telephone services.    This opens up the possibility of maintaining the overall level of taxpayer  service but with a different menu of service choices.  Cuts in selected  services could be offset by the new and improved services.
Generally, as indicated in the budget, the menu of taxpayer services that  IRS provides covers assistance, outreach, and processing.  Assistance  includes answering taxpayer questions via telephone, correspondence, and  face-to-face at its walk-in sites. Outreach includes educational programs  and the development of partnerships.  Processing includes issuing millions  of tax refunds.
When considering program reductions, we support a targeted approach  rather than across-the-board cuts.  A targeted approach helps reduce the  risk that effective programs are reduced or eliminated while ineffective or  lower priority programs are maintained.
With the above reasons in mind for reconsidering IRS’s menu of services,  we have compiled a list of options for targeted reductions in taxpayer  service.  The options on this list are not recommendations but are intended  to contribute to a dialogue about the tradeoffs faced when setting IRS’s  budget.   The options presented meet at least one of the following criteria  that we generally use to evaluate programs or budget requests.  These  criteria include that the activity   duplicates other efforts that may be more effective and/or efficient;   historically does not meet performance goals or provide intended  results as reported by GAO, TIGTA, IRS, or others;   experiences a continued decrease in demand;   lacks adequate oversight, implementation and management plans, or  structures and systems to be implemented effectively;   has been the subject of actual or requested funding increases that  cannot be adequately justified; or  has the potential to make an agency more self-sustaining by charging  user fees for services provided.
We recognize that the options listed below involve tradeoffs.  In each case,  some taxpayers would lose a service they use.  However, the savings could  be used to help maintain the quality of other services.   We also want to give  IRS credit for identifying savings, including some on this list.   The options  include  closing walk-in sites.  As the filing season section of this testimony  discusses, taxpayer demand for walk-in services has continued to  decrease and staff answer a more limited number of tax law questions in  person than staff answer via telephone.    limiting the type of telephone questions answered by IRS assistors.  IRS  assistors still answer some refund status questions even though IRS  provides automated answers via telephone and its Web site.    mandating electronic filing for some filers such as paid preparers or  businesses.  As noted, efficiency gains from electronic filing have  enabled IRS to consolidate paper processing operations.   charging for services.  For example, IRS provides paid preparers with  information on federal debts owed by taxpayers seeking refund  anticipation loans.
section_title: Progress in BSM Implementation, but the Program Remains High Risk and Budget Reductions Have Resulted in Significant Adjustments
paragraphs: Although IRS has implemented important elements of the BSM program,  much work remains. In particular, the BSM program remains at high risk  and has a long history of significant cost overruns and schedule delays.  Furthermore, budget reductions have resulted in significant adjustments to  the BSM program, although it is too early to determine their ultimate effect.
subsections: section_title: IRS Has Made Progress in Implementing BSM, but Much Work Remains
paragraphs: IRS has long relied on obsolete automated systems for key operational and  financial management functions, and its attempts to modernize these aging  computer systems span several decades. IRS’s current modernization  program, BSM, is a highly complex, multibillion-dollar program that is the  agency’s latest attempt to modernize its systems. BSM is critical to  supporting IRS’s taxpayer service and enforcement goals. For example,  BSM includes projects to allow taxpayers to file and retrieve information  electronically and to provide technology solutions to help reduce the  backlog of collections cases. BSM is important for another reason. It allows  IRS to provide the reliable and timely financial management information  needed to account for the nation’s largest revenue stream and better enable  the agency to justify its resource allocation decisions and congressional  budgetary requests.
Since our testimony before this subcommittee on last year’s budget  request, IRS has deployed initial phases of several modernized systems  under its BSM program. The following provides examples of the systems  and functionality that IRS implemented in 2004 and the beginning of 2005.
Modernized e-File (MeF). This project is intended to provide electronic  filing for large corporations, small businesses, and tax-exempt  organizations. The initial releases of this project were implemented in  June and December 2004, and allowed for the electronic filing of forms  and schedules for the form 1120 (corporate tax return) and form 990  (tax-exempt organizations’ tax return). IRS reported that, during the  2004 filing season, it accepted over 53,000 of these forms and schedules  using MeF.   e-Services. This project created a Web portal and provided other  electronic services to promote the goal of conducting most IRS  transactions with taxpayers and tax practitioners electronically. IRS  implemented e-Services in May 2004. According to IRS, as of late March  2005, over 84,000 users have registered with this Web portal.
Customer Account Data Engine (CADE). CADE is intended to replace  IRS’s antiquated system that contains the agency’s repository of  taxpayer information and, therefore, is the BSM program’s linchpin and  highest priority project. In July 2004 and January 2005, IRS implemented  the initial releases of CADE, which have been used to process filing year  2004 and 2005 1040EZ returns, respectively, for single taxpayers with  refund or even-balance returns. According to IRS, as of March 16, 2005,  CADE had processed over 842,000 tax returns so far this filing season.
Integrated Financial System (IFS). This system replaces aspects of  IRS’s core financial systems and is ultimately intended to operate as its  new accounting system of record. The first release of this system  became fully operational in January 2005.
Although IRS is to be applauded for delivering such important  functionality, the BSM program is far from complete. Future deliveries of  additional functionality of deployed systems and the implementation of  other BSM projects are expected to have a significant impact on IRS’s  taxpayer services and enforcement capability. For example, IRS has  projected that CADE will process about 2 million returns in the 2005 filing  season. However, the returns being processed in CADE are the most basic  and constitute less than 1 percent of the total tax returns expected to be  processed during the current filing season. IRS expects the full  implementation of CADE to take several more years. Another BSM  project—the Filing and Payment Compliance (F&PC) project—is expected  to increase (1) IRS’s capacity to treat and resolve the backlog of delinquent  taxpayer cases, (2) the closure of collection cases by 10 million annually by  2014, and (3) voluntary taxpayer compliance. As part of this project, IRS  plans to implement an initial limited private debt collection capability in  January 2006, with full implementation of this aspect of the F&PC project  to be delivered by January 2008 and additional functionality to follow in  later years.
section_title: BSM Program Has History of Cost Increases and Schedule Delays and Is High Risk
paragraphs: The BSM program has a long history of significant cost increases and  schedule delays, which, in part, has led us to report this program as high-  risk since 1995. Appendix II provides the history of the BSM life-cycle cost  and schedule variances. In January 2005 letters to congressional  appropriation committees, IRS stated that it had showed a marked  improvement in significantly reducing its cost variances. In particular, IRS  claimed that it reduced the variance between estimated and actual costs  from 33 percent in fiscal year 2002 to 4 percent in fiscal year 2004.  However, we do not agree with the methodology used in the analysis  supporting this claim. Specifically, (1) the analysis did not reflect actual  costs, instead it reflected changes in cost estimates (i.e., budget  allocations) for various BSM projects; (2) IRS aggregated all of the changes  in the estimates associated with the major activities for some projects,  such as CADE, which masked that monies were shifted from future  activities to cover increased costs of current activities; and (3) the  calculations were based on a percentage of specific fiscal year  appropriations, which does not reflect that these are multiyear projects.
In February 2002 we expressed concern over IRS’s cost and schedule  estimating and made a recommendation for improvement. IRS and its  prime systems integration support (PRIME) contractor have taken action  to improve their estimating practices, such as developing a cost and  schedule estimation guidebook and developing a risk-adjustment model to  include an analysis of uncertainty. These actions may ultimately result in  more realistic cost and schedule estimates, but our analysis of IRS’s  expenditure plans over the last few years shows continued increases in  estimated project life-cycle costs (see fig. 3).
The Associate CIO for BSM stated that he believes that IRS’s cost and  schedule estimating has improved in the past year. In particular, he pointed  out that IRS met its cost and schedule goals for the implementation of the  latest release of CADE, which allowed the agency to use this system to  process certain 1040EZ forms in the 2005 filing season. It is too early to tell  whether this signals a fundamental improvement in IRS’s ability to  accurately forecast project costs and schedules.
The reasons for IRS’s cost increases and schedule delays vary. However, we  have previously reported that they are due, in part, to weaknesses in  management controls and capabilities. We have previously made  recommendations to improve BSM management controls, and IRS has  implemented or begun to implement these recommendations. For example,  in February 2002, we reported that IRS had not yet defined or implemented  an IT human capital strategy, and recommended that IRS develop plans for  obtaining, developing, and retaining requisite human capital resources. In  September 2003, TIGTA reported that IRS had made significant progress in  developing a human capital strategy but that it needed further  development. In August 2004, the current Associate CIO for BSM identified  the completion of a human capital strategy as a high priority. Among the  activities that IRS is implementing are prioritizing its BSM staffing needs  and developing a recruiting plan. IRS has also identified, and is addressing,  other major management challenges in areas such as requirements,  contract, and program management. For example, poorly defined  requirements have been among the significant weaknesses that have been  identified as contributing to project cost overruns and schedule delays. As  part of addressing this problem, in March 2005, the IRS BSM office  established a requirements management office, although a leader has not  yet been hired.
section_title: IRS Is Adjusting the BSM Program in Response to Budget Reductions
paragraphs: The BSM program is undergoing significant changes as it adjusts to  reductions in its budget. Figure 4 illustrates the BSM program’s requested  and enacted budgets for fiscal years 2004 through 2006. For fiscal year  2005, IRS received about 29 percent less funding than it requested (from  $285 million to $203.4 million). According to the Senate report for the fiscal  year 2005 Transportation, Treasury, and General Government  appropriations bill, in making its recommendation to reduce BSM funding,  the Senate Appropriations Committee was concerned about the program’s  cost overruns and schedule delays. In addition, the committee emphasized  that in providing fewer funds, it wanted IRS to focus on its highest priority  projects, particularly CADE. In addition, IRS’s fiscal year 2006 budget  request reflects an additional reduction of about 2 percent, or about $4.4  million, from the fiscal year 2005 appropriation.
It is too early to tell what effect the budget reductions will ultimately have  on the BSM program. However, the significant adjustments that IRS is  making to the program to address these reductions are not without risk,  could potentially impact future budget requests, and will delay the  implementation of certain functionality that was intended to provide  benefit to IRS operations and the taxpayer. For example:  Reductions in Management reserve/project risk adjustments. In  response to the fiscal year 2005 budget reduction, IRS reduced the  amount that it had allotted to program management reserve and project  risk adjustments by about 62 percent (from about $49.1 million to about  $18.6 million). If BSM projects have future cost overruns that cannot  be covered by the depleted reserve, this reduction could result in  (1) increased budget requests in future years or (2) delays in planned  future activities (e.g., delays in delivering promised functionality) to use  those allocated funds to cover the overruns.
Shifts of BSM management responsibility from the PRIME contractor  to IRS.  Due to budget reductions and IRS’s assessment of the PRIME  contractor’s performance, IRS decided to shift significant BSM  responsibilities for program management, systems engineering, and  business integration from the PRIME contractor to IRS staff. For  example, IRS staff are assuming responsibility for cost and schedule  estimation and measurement, risk management, integration test and  deployment, and transition management. There are risks associated  with this decision. To successfully accomplish this transfer, IRS must  have the management capability to perform this role. Although the BSM  program office has been attempting to improve this capability through,  for example, implementation of a new governance structure and hiring  staff with specific technical and management expertise, IRS has had  significant problems in the past managing this and other large  development projects, and acknowledges that it has major challenges to  overcome in this area.
Suspension of the Custodial Accounting Project (CAP). Although the  initial release of CAP went into production in September 2004, IRS has  decided not to use this system and to stop work on planned  improvements due to budget constraints. According to IRS, it made this  decision after it evaluated the business benefits and costs to develop  and maintain CAP versus the benefits expected to be provided by other  projects, such as CADE. Among the functionality that the initial releases  of CAP were expected to provide were (1) critical control and reporting  capabilities mandated by federal financial management laws; (2) a  traceable audit trail to support financial reporting; and (3) a subsidiary  ledger to accurately and promptly identify, classify, track, and report  custodial revenue transactions and unpaid assessments. With the  suspension of CAP, it is now unclear how IRS plans to replace the  functionality this system was expected to provide, which was intended  to allow the agency to make meaningful progress toward addressing  long-standing financial management weaknesses. IRS is currently  evaluating alternative approaches to addressing these weaknesses.
Reductions in planned functionality. According to IRS, the fiscal year  2006 funding reduction will result in delays in planned functionality for  some of its BSM projects. For example, IRS no longer plans to include  Form 1041 (the income tax return for estates and trusts) in the fourth  release of Modernized e-File, which is expected to be implemented in  fiscal year 2007.
The BSM program is based on visions and strategies developed in 2000 and  2001. The age of these plans, in conjunction with the significant delays  already experienced by the program and the substantive changes brought  on by budget reductions, indicate that it is time for IRS to revisit its long- term goals, strategy, and plans for BSM. Such an assessment would include  an evaluation of when significant future BSM functionality would be  delivered. IRS’s Associate CIO for BSM has recognized that it is time to  recast the agency’s BSM strategy because of changes that have occurred  subsequent to the development of the program’s initial plans. According to  this official, IRS is redefining and refocusing the BSM program, and he  expects this effort to be completed by the end of this fiscal year.
section_title: Additional Actions Needed to Improve Budgeting for IT Operations and Maintenance
paragraphs: IRS has requested about $1.62 billion for IT operations and maintenance in  fiscal year 2006, within its proposed new Tax Administration and  Operations account. Under the prior years’ budget structure, these funds  were included in a separate account, for which IRS received an  appropriation of about $1.59 billion in fiscal year 2005. The $1.62 billion  requested in fiscal year 2006 is intended to fund the personnel costs for IT  staff (including staff supporting the BSM program) and activities such as IT  security, enterprise networks, and the operations and maintenance costs of  its current systems. We have previously expressed concern that IRS does  not employ best practices in the development of its IT operations and  maintenance budget request. Although IRS has made progress in  addressing our concern, more work remains.
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. In addition, 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   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 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 a variety of  actions, which it has made progress in implementing. For example, IRS  stated that it planned to develop an activity-based cost model to plan,  project, and report costs for business tasks/activities funded by the  information systems budget. The recent release of IFS included an activity- based cost module, but IRS does not currently have historical cost data to  populate this module. According to officials in the Office of the Chief  Financial Officer, IRS is in the process of accumulating these data. These  officials stated that IRS needs 3 years of actual costs to have the historical  data that would provide a basis for future budget estimates. Accordingly,  these officials expected that IRS would begin using the IFS activity-based  cost module in formulating the fiscal year 2008 budget request and would  have the requisite 3 years’ of historical data in time to develop the fiscal  year 2010 budget request. In addition, IRS planned to develop a capital  planning guide to implement processes for capital planning and investment  control, budget formulation and execution, business case development,  and project prioritization. IRS has developed a draft guide, which is  currently under review by IRS executives, and IRS expects it to become  policy on October 1, 2005. Although progress has been made in  implementing best practices in the development of the IT operations and  maintenance budget, until these actions are completely implemented IRS  will not be able to ensure that its request is adequately supported.
section_title: So Far This Filing Season IRS Has Generally Maintained or Improved Performance, Including Telephone Accuracy, with Less Funding
paragraphs: Results to date show IRS has generally maintained or improved its 2005  filing season performance in key areas compared to last year despite a  decrease in the 2005 budget for taxpayer service. These key areas are paper  and electronic processing, telephone assistance, IRS’s Web site, and walk- in assistance. Table 4 shows performance to date in these four areas.
Overall IRS’s filing season performance to date is good news because, as  table 1 shows (page 6), IRS’s budget for taxpayer service is $104 million  less than the year before.  According to IRS officials, it absorb this  reduction by generating additional internal savings and program  reductions.  However, because the filing season is not over, the extent to  which IRS will achieve efficiency gains and the full impact of reductions on  taxpayers in this or future filing seasons is not yet known.
subsections: section_title: Processing Has Been Smooth, Staff Continues to Decline, and Electronic Filing Continues to Grow but not at a Rate to Meet Long-term Goal
paragraphs: As of March 18, IRS processed about 63 million individual income tax  returns and 57 million refunds. According to IRS data and information from  external stakeholders such as paid practitioners, processing has been  uneventful and without significant disruptions. IRS officials attribute this  year’s smooth processing to adequate planning and few tax law changes.   This year’s processing activities are important, in part, because for the first  time during the filing season, IRS is using CADE to process the simplest  taxpayer accounts (1040EZ without problems or balance due).  As we note  in the BSM section, CADE is the foundation of IRS’s modernization effort  and will ultimately replace the Individual Master File that currently houses  taxpayer data for individual filers.  As of March 16, 2005, CADE has  processed over 842,000 tax returns without significant problems.
Growth in electronic filing (e-filing) helps fund IRS’s modernization.   Electronic filing allows IRS to control costs by reducing labor-intensive  processing of paper tax returns. E-filing also improves taxpayer service by  eliminating transcription errors associated with processing paper returns.   E-filing also has benefits for taxpayers, primarily by allowing them to get  their refunds in half the time of paper filers.
As shown in figure 5, the number of e-filed returns has increased since 1999  and the number of paper returns has decreased.  The figure also shows that  these changes have allowed IRS to reduce the staff devoted to processing  paper returns between 1999 and 2004 by just over 1,100 staff years.  As the  number of e-filed returns has increased, the number of staff years used to  process those returns has not.  The decline in paper processing staff  allowed IRS to close its Brookhaven processing center in 2003. In addition,  IRS is in the process of closing its paper processing operation in Memphis.
Although the growth in e-filing is about 6.7 percent over the same period  last year, it is growing at a slower rate than previous years. Based on the  current trend and the fact that the percentage of returns e-filed traditionally  declines as April 15 approaches, it appears that IRS will not achieve its goal  of having 68.2 million individual tax returns e-filed this year (an 11 percent  increase over last year).
Over recent years, IRS has undertaken numerous initiatives to increase  e-filing. However, neither this year’s current growth rate nor the projected  annual growth rate will enable IRS to achieve its goal of 80 percent of all  individual tax returns being e-filed in 2007. This goal has focused attention  on increasing e-filing.  As we reported last year, IRS officials believe that  achieving the goal would require additional measures to convert the tens of  millions of taxpayers and tax practitioners who prepare individual income  tax returns on a computer, but filed on paper to e-filing. IRS officials also  stated that the additional measures might need to include legislation that  mandates e-filing for certain classes of returns, such as those prepared by  practitioners.  Last year we reported five states, including California, that  mandated the e-filing of state tax returns, also showed increases in the e- filing of federal returns. This year, three additional states have introduced  mandatory e-filing of state returns by tax practitioners.
section_title: Telephone Access Has Remained Relatively Stable and Accuracy Has Improved
paragraphs: Between January 1 and March 12, IRS received approximately 23 million  calls. As shown in table 4, IRS’s automated service handled nearly 14  million calls and customer service representatives (CSRs) handled just  over 9 million. The percentage of taxpayers who attempted to reach CSRs  and actually got through and received service—referred to as the CSR level  of service—remained relatively stable at 83 percent compared to 84  percent at the same time last year.
IRS reduced its 2005 goal for CSR level of service from 85 percent in 2004  to 82 percent because of the budget reduction for taxpayer service.   However, IRS has been able to achieve a relatively stable CSR level of  service of 83 percent since last year.  According to IRS officials, this level of  performance is due to  staff plans being made before the level of service goal was reduced;  the agency receiving fewer calls due to fewer tax law changes than in   the agency  improving methods for handling calls; and   an increased use of IRS’s Web site.
Although CSR level of service is about the same as last year, down one  percentage point, there are other indications of slippage in telephone  access.  Specifically, taxpayers are waiting longer to speak to a CSR. Wait  times have increased by about 35 seconds or 15 percent compared to the  same period last year.   Additionally, the rate at which taxpayers abandon  their calls to IRS increased from 10 percent to 11.5 percent, which  translates into about 99,000 calls.  The responsible IRS official considers  the increase in wait time and increase in abandon rate to be acceptable, in  part because IRS data are showing that the agency is using 9 percent fewer  FTEs than last year and answering 195 more calls per FTE.
IRS officials said they lowered the CSR level of service goal in response to  the reduction in the taxpayer service budget, and will adjust staffing plans  after the filing season to address the taxpayer service budget reduction.   IRS officials believe the adjustments will likely result in a lower level of  service than is currently being achieved.
IRS estimates that the accuracy of CSRs’ answers to taxpayers’ tax law  questions improved compared to last year.  Specifically, tax law accuracy  increased to an estimated 87 percent as compared to 76 percent at the same  time last year.  This represents a significant change from last year, when we  drew attention to the declining tax law accuracy rate.  According to IRS  officials and staff, the improvement is primarily due to formatting changes  made in 2004 to the guide that CSRs use to help them answer taxpayers’ tax  law questions that have enhanced the usability of the guide.  IRS officials  stated that the revised guide is better and more user-friendly, partly  because many of the suggested improvements were from CSRs who use the  guide daily.  In addition, IRS officials stated that the improved tax law  accuracy rate reveals that the previous version of the guide was indeed the  reason for last year’s decline in tax law accuracy, and attributed  fluctuations in the tax law accuracy rate to changes in the guide in past  years.
IRS estimates that accounts accuracy (the accuracy of answers to  questions from taxpayers about the status of their accounts) has improved  compared to last year and since 2002. Taxpayers who called about their  accounts received correct information an estimated 92 percent of the time,  which is an improvement compared to last year’s 89 percent rate and the 88  percent rate seen in 2002 and 2003. The responsible IRS official told us that  accounts accuracy rates have improved because IRS has improved its  ability to monitor and manage staff, expanded training, and improved its  ability to search for account information.
section_title: Web Site Performing Well and Used Extensively
paragraphs: Various data indicate that IRS’s Web site is performing well. We found it to  be user-friendly because it was readily accessible and easy to navigate.   Problem areas that we reported in the past, such as the search function,  were much improved this filing season, thus eliminating our previous  concerns about the search function. Furthermore, an independent weekly  study done during the filing season has reported that IRS’s Web site has  ranked in the top 4 out of 40 government Web sites and that users were able  to access the IRS Web site in .65 seconds or less.  The same independent  weekly assessment reported that IRS ranked first or second in response  time of downloading data. Finally, the electronic tax law assistance  program on IRS’s Web site has shown marked improvement this year over  last. For example, the average response time is down from 3.8 days to 1.6  days and the accuracy rate has improved from 56.9 percent to 87.5  percent.  According to IRS officials, this significant improvement is due to  a decrease in the number of tax law questions being submitted—down  from about 56,000 to 8,700 for the same time period.
IRS’s Web site is experiencing extensive usage this filing season based on  the number of visits, pages viewed, and forms and publications  downloaded. As of February 28, 2005, the Web site was visited about 83  million times by users who viewed about 628 million pages. This is the first  time that IRS has publicly reported the number of visits to and number of  pages viewed on its Web site.  Further, about 70.3 million forms and  publications had been downloaded this fiscal year through February, with  about 45 million of those downloads occurring in January and February.
IRS’s Web site continues to provide two very important tax service  features: (1) “Where’s My Refund,” which enables taxpayers to check on  the status of their refund and (2) Free File, which provides taxpayers the  ability to file their tax return electronically for free via IRS’s Web site.   As  of March 20, 2005, about 16 million taxpayers accessed the “Where’s My  Refund” feature to check the status of their tax refund—about a 15 percent  increase over the same time period last year.   Also, IRS provided new  functionality for “Where’s My Refund” whereby a taxpayer whose refund  could not be delivered by the Postal Service (i.e., returned as undeliverable  mail), can change their address on the Web site. In addition, as of March 16,  2005, 3.6 million tax returns had been filed via Free File, which represents a  44 percent increase over the same time period last year. In the 2005 filing  season, all individual taxpayers are eligible to file free via IRS’s Web site.
section_title: Use of IRS’s Walk-in Assistance Continues to Decline, While Use of Volunteer Assistance Increases
paragraphs: As of March 12, assistance provided at IRS’s approximately 400 walk-in  sites declined by 11 percent compared to the same time last year, with the  number receiving tax preparation assistance declining by about 22 percent.   Staff at those sites provides taxpayers with information about their tax  accounts and answer a limited scope of tax law questions.  If staff cannot  answer taxpayers’ questions, they are required to refer taxpayers to IRS’s  telephone operations or have taxpayers correspond via IRS’s Web site.  In  combination with decreased demand, IRS reduced the staff used at walk-in  sites for return preparation assistance and continues to encourage  taxpayers to use volunteer sites for return preparation.  These declines are  consistent with IRS’s goal to further limit return preparation and tax law  assistance at walk-in sites by 2007 and with its 2006 budget request.
As reflected in table 4 and figure 6, in contrast to IRS walk-in sites, the  number of taxpayers seeking return preparation assistance at volunteer  sites has increased this year and every year since 2001. These sites, staffed  by volunteers certified by IRS, do not offer the range of services IRS  provides, but instead focus on preparing tax returns primarily for low- income and elderly taxpayers and operate chiefly during the filing season.   IRS officials estimated that the number of taxpayers receiving assistance at  approximately 14,000 volunteer sites has increased over 23 percent  compared to the same time last year.
The shift of taxpayers from walk-in to volunteer sites is important, because  it has transferred time-consuming services, particularly return preparation,  from IRS to volunteer sites and allowed IRS to concentrate on services that  only it can provide such as account assistance or compliance work.   As a  result, IRS has devoted fewer resources to return preparation.  While this  shift is important to IRS, others have been more cautious. For example, in  her January 2005 report, the Taxpayer Advocate has expressed concern  about the reduction of face-to-face services, such as those offered at walk- in sites.  She stated that IRS’s plan does not adequately provide for the  segment of the population that continues to rely on the interaction  provided by walk-in sites.   At the same time, last year, we and TIGTA  called attention to issues related to the quality of service at both IRS walk- in and volunteer sites.  IRS has separate quality initiatives under way at  both IRS walk-in sites and volunteer sites, although data remain limited and  cannot be compared to prior years.
section_title: Conclusions
paragraphs: As IRS shifts its priorities to enforcement and faces tight budgets for  service, the agency will be challenged to maintain the gains it has made in  taxpayer service.  In order to avoid a “swinging pendulum,” where  enforcement gains are achieved at the cost of taxpayer service and vice  versa, IRS and the Congress would benefit from a set of agreed-upon long- term goals.  Long-term goals would provide a framework for assessing  budgetary tradeoffs between taxpayer service and enforcement and  whether IRS is making satisfactory progress towards achieving those goals.   Similarly, long-term goals could help identify priorities within the taxpayer  service and enforcement functions.  For example, if the budget for taxpayer  service were to be cut and efficiency gains did not offset the cut, long-term  goals could help guide decisions about whether to make service cuts across  the board or target selected services.  To its credit, IRS has been developing  a set of long-term goals, so we are not making a recommendation on goals.   However, we want to underscore the importance of making the goals  public in a timely fashion, as IRS has planned.  The Congress would then  have an opportunity to review the goals and start using them as a tool for  holding IRS accountable for performance.
In addition, the Congress would benefit from more information about the  short-term impacts of the 2006 budget request on taxpayers.  The 2006  budget request cites a need for reducing the hours of telephone service and  scaling back walk-in assistance but provides little additional detail.   Without more detail about how taxpayers will be affected, it is difficult to  assess whether the 2006 proposed budget would allow IRS to achieve its  stated intent of both maintaining a high level of taxpayer service and  increasing enforcement.
BSM and related initiatives such as electronic filing hold the promise of  delivering further efficiency gains that could offset the need for larger  budget increases to fund taxpayer service and enforcement.  Today,  taxpayers have seen payoffs from BSM; however, the program is still high  risk and budget reductions have caused substantive program changes.  IRS  has recognized it is time to revisit its long-term BSM strategy and is  currently refocusing the program.   As we did with long-term goals above,  we want to underscore the importance of timely completion of the revision  of the BSM strategy.
section_title: Recommendation
paragraphs: We recommend that the Commissioner of Internal Revenue supplement the  2006 budget request with more detailed information on how proposed  service reductions would impact taxpayers.
section_title: Description of IRS’s Proposed Budget Structure
paragraphs: IRS's proposed new budget structure as depicted in figure 7 combines the  three major appropriations that the agency has had in the past— Processing, Assistance, and Management; Tax Law Enforcement; and  Information Systems into one appropriation called Tax Administration and  Operations. The Business Systems Modernization and Health Insurance  Tax Credit Administration appropriations accounts remain unchanged.   The Tax Administration and Operations appropriation is divided among  eight critical program areas. These budget activities focus on Assistance,  Outreach, Processing, Examination, Collection, Investigations, Regulatory  Compliance, and Research. According to IRS, as it continues to move  forward with developing and implementing this new structure, these  program areas and the associated resource distributions will be refined to  provide more accurate costing.
IRS reported that the new budget structure has a more direct relationship  to its major program areas and strategic plan.  We did not evaluate IRS's  proposed budget structure as part of this engagement because it was not  within the scope of our review.   However, we have recently completed a  study on the administration's broader budget restructuring effort.  In that  study we say that, going forward, infusing a performance perspective into  budget decisions may only be achieved when the underlying information  becomes more credible and used by all major decision makers.  Thus, the  Congress must be considered a partner.  In due course, once the goals and  underlying data become more compelling and used by the Congress,  budget restructuring may become a better tool to advance budget and  performance integration.
section_title: BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary
paragraphs: The table below shows the life-cycle variance in cost and schedule  estimates for completed and ongoing Business Systems Modernization  (BSM) projects, based on data contained in IRS's expenditure plans. These  variances are based on a comparison of IRS's initial and revised (as of July  2004) cost and schedule estimates to complete initial operation or full  deployment of the projects.
section_title: How IRS Allocated Expenditures and Full- Time Equivalents in Fiscal Year 2004
paragraphs: Figures 8 and 9 illustrate how the Internal Revenue Service (IRS) allocated  expenditures and full-time equivalents (FTE) in fiscal year 2004.  Figure 8  shows total expenditures.  The percentage of expenditures devoted to  contracts decreased from 9 percent in 2002 to 5 percent in 2004, because of  fewer private contracts.  The percentage of expenditures devoted to other  nonlabor costs increased from 8 percent in 2002 to 12 percent in 2004, due  to increases in miscellaneous costs.
Figure 9 shows IRS’s total FTEs. FTEs have decreased slightly from 99,180  in 2002 to 99,055 in 2004. We previously reported that processing FTEs  declined 1 percentage point between 2002 and 2003. Between 2003 and  2004, IRS’s allocation of FTEs remained similar with a 1 percentage point  increase in conducting examinations, and in management and other  services.