IRS 2014 Budget: Improvements Made to Budget Request and Cost Estimate, but Further Actions Needed
Released: 2013-09-26T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: The financing of the federal government depends largely on IRS's ability to administer the tax laws, which includes providing service to taxpayers and enforcing the law to ensure everyone pays the taxes they owe. For fiscal year 2014, the President requested $12.9 billion for IRS, an increase of 9 percent over fiscal year 2012 actual levels.

Because of the size of IRS's budget and the importance of its programs, GAO was asked to review the fiscal year 2014 budget request. In April and May 2013, GAO reported preliminary observations on IRS's budget. Among other things, this report assesses how IRS prioritizes new initiatives; steps IRS has taken to improve the PPACA cost estimate and the reporting transparency of the related IT investment; and the type of information available in the budget justification about major IT systems. To address these objectives, GAO reviewed the fiscal year 2014 budget justification, compared the updated PPACA cost estimate to GAO's Cost Estimating and Assessment Guide, and interviewed IRS Corporate Budget officials.

section_title: What GAO Found
paragraphs: For the fiscal year 2014 budget formulation process, the Internal Revenue Service (IRS) implemented a new process that uses templates to help screen, prioritize, and select new initiatives before detailed business cases are developed to support funding requests. The template information that GAO reviewed varied in detail and scope; for some, IRS guidance may have contributed to incomplete submissions to senior leadership. According to Office of Management and Budget Circular A-94, in order to evaluate and compare funding initiatives, decision-makers need to be aware of benefits, costs, and strategies related to achieving program goals. By improving guidance on the type of data to include, IRS could help ensure the templates are fully completed.

IRS significantly improved its Patient Protection and Affordable Care Act (PPACA) cost estimate. In particular, the December 2012 estimate is more comprehensive, reflecting the full life-cycle cost of the program--estimated at $1.89 billion for fiscal year 2010 through 2026. A few areas of improvement remain, primarily regarding the accuracy and credibility of the cost estimate. For example, IRS showed how the December 2012 estimate differed from the previous estimate, but did not explain the factors that resulted in the variances. In addition, IRS did not obtain a second cost estimate that could be used to assess the reasonableness of the $1.89 billion estimated program costs.

Although the information technology (IT) systems for PPACA met dollar thresholds (as outlined in the Department of Treasury's guidance) as a major investment for public reporting, IRS did not report this as such. Officials told GAO they did not have time to prepare the information for the fiscal year 2014 budget justification, but plan to do so for fiscal year 2015. Until IRS publicly reports the IT systems for PPACA as a major investment, transparency about these systems' implementation and administration is limited.

Although IRS included new and useful information on its major IT investments in the budget justification (such as life-cycle costs) other important information (such as the start date and percent of life-cycle costs obligated) is reported elsewhere or must be calculated. IRS officials said they could consolidate this information for ease of review. Consolidating key budget and performance data would ensure Congress has comprehensive, easily accessible information on major IT investments to guide decisions.

section_title: What GAO Recommends
paragraphs: GAO recommends that IRS improve budget formulation guidance for new initiatives; improve the accuracy and credibility of future updates to the PPACA cost estimate as well as report the related IT investment publicly; and consolidate major IT investment reporting. IRS agreed with three of GAO's four recommendations and agreed with the majority of the actions associated with improving the accuracy and credibility of the PPACA cost estimate.

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 services to make voluntary compliance easier and  enforcing tax laws to ensure everyone meets their obligation to pay taxes.  For fiscal year 2014, the President requested a $12.9 billion budget for  the IRS. This is an increase of 9 percent ($1,044 million) in discretionary  funding over the fiscal year 2012 appropriation, and an increase of 8  percent (6,732 full-time equivalents) in staffing over the fiscal year 2012  actual levels. In April and May of 2013, we reported preliminary  observations on the fiscal year 2014 budget request for IRS; we also  reported budget and staffing trends from fiscal year 2010 through 2014,  work we conducted related to proposals highlighted in the President’s  budget request, and reductions to the fiscal year 2013 budget for IRS that  were due to the continuing resolution and sequestration. Specific  amounts requested for fiscal year 2014 for IRS’s four appropriation  accounts are $5.7 billion for enforcement, $4.5 billion for operations  support, $2.4 billion for taxpayer services, and $301 million for Business  Systems Modernization (BSM).

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 2014 budget request for IRS. In this report we (1) describe IRS’s  capacity to report fiscal year 2012 obligations and FTEs by program  activity, organizational entity, and other efforts of interest; (2) assess  IRS’s process and the type of information used to prioritize and select  new program initiatives; (3) describe proposed base budget savings; (4)  describe IRS’s new projected return on investment (ROI) methodologies;  (5) evaluate steps IRS took to improve the cost estimate for the Patient  Protection and Affordable Care Act (PPACA) in accordance with GAO’s  Cost Estimating and Assessment Guide (GAO Cost Guide) and  determine the extent to which IRS is transparently reporting on the  Affordable Care Act (ACA) information technology (IT) investment; (6)  summarize IRS’s major IT investments and assess the type of information  available in the congressional justification; and (7) describe IRS’s  progress in implementing our prior budget-related recommendations.

To conduct this work for all objectives, we reviewed key documents, such  as the fiscal year 2014 congressional budget justification for IRS and  IRS’s Financial Management Handbook. For the first objective, we  analyzed inputs and outputs to the budget formulation process, and  determined IRS’s ability to report information for eight program activities,  organizational entities, and efforts of interest. For the second objective,  we reviewed guidance related to IRS’s pre-selection budget formation  process, and reviewed submissions for completeness against criteria  outlined in the Office of Management and Budget (OMB) Circular A-94.  For the third objective, we reviewed supporting documents obtained from  IRS on its proposed fiscal year 2014 budget savings. For the fourth  objective, we reviewed relevant studies on methods to calculate ROI. For  the fifth objective, we analyzed the updated PPACA cost estimate and  compared it to the characteristics of a high-quality cost estimate, as  identified in the GAO Cost Guide. For the sixth objective, we reviewed  Exhibit 300 “capital asset summaries,” prepared by IRS for major IT  investments, as well as IRS and OMB guidance on preparing those  documents, such as the Office of Management and Budget Guidance on  Exhibits 53 and 300—Information Technology and E-Government. For the  seventh objective, we obtained information on prior year budget  recommendations from various IRS officials and reviewed relevant  documentation to determine if they were implemented. In addition, we  interviewed IRS officials, including those from the Corporate Budget  Office, selected business units, the Office of Compliance Analytics, and  the Affordable Care Act program office. 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.

We conducted this performance audit from October 2012 to September  2013 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. For further details on our  scope and methodology, see appendix I.
subsections: section_title: Background
subsections: section_title: IRS Budget Formulation and Execution Structures
paragraphs: IRS formulates its budget at three levels: appropriation account, budget  activity, and program activity, as shown in figure 1. (See appendix II for  the non-interactive figure of IRS’s budget formulation structure.) The  annual budget request for IRS presents funding and FTE data at the  appropriation and budget activity levels. IRS formulates its budget to align  with its strategic goals, which is an intended outcome of the Government  Performance and Results Act of 1993 (GPRA).

IRS executes its budget by allocating funds from its appropriation  accounts to fund centers. Fund centers manage and distribute funds and  allocate funds to sub-units, known as cost centers, where funds are  obligated.

IRS’s appropriation accounts align with its organizational structure at the  highest level. For example, IRS has an Operations Support appropriation  account and an Operations Support commissioner-level organization. In  addition, IRS’s organizational structure tracks roughly to its budget  execution structure, which is made up of three types of fund centers: (1)  support, (2) functional, and (3) operating. (See figure 2.)

The lower levels of the budget formulation and budget execution  structures include (1) program activities, which break down the budget  activities and are listed above; and (2) organizational entities and other  efforts of interest, which are not discrete categories and are different  perspectives of IRS’s organizational structure. For example, Wage and  Investment is one division within IRS and can be referred to as an  organizational entity, while identity theft would be considered an area of  interest that crosses divisions within IRS, including Wage and Investment.

section_title: Alignment of Budget Execution and Formulation Processes
paragraphs: Prior to the preparation of the annual budget request, IRS budget staff  ensure that FTE movements between budgetary accounts made during  the fiscal year (e.g., shifting staff to work on different issues) match up  with base budget resources assigned to each account. This review (which  is conducted by the IRS Corporate Budget Office in coordination with  business units) is necessary because business units may have added or  eliminated staff during the course of the fiscal year, which can result in a  misalignment of funding and FTEs during budget formulation. Further, the  review ensures that FTEs—which represent the majority of IRS’s  budgetary resources—are fully funded by appropriation accounts and that  salary and benefits are aligned with current FTE levels.

section_title: IRS Can Report Some Program-Level Obligations and FTE Data
subsections: section_title: Obligations and FTE Data Are Available for Some Program Activities, Organizational Entities, and Efforts of Interest with Limitations
paragraphs: In its annual budget request, IRS provides funding information at the  appropriation account and budget activity levels, but not at the more  detailed program activity level. IRS officials stated that they could provide  more information at the program activity level; however, reporting on  requested funding amounts for program activities could limit IRS’s  flexibility to reprogram funds given statutory restrictions. Still, as we  reported in May 2010, IRS could provide additional information that  highlights new program activities or those that are proposed for either  expansion or reduction. This more detailed information could increase  transparency and demonstrate the agency’s priorities to congressional  decision makers.

As an alternative to more detailed information on requested funds, IRS  Corporate Budget officials told us they could provide prior year obligations  and FTE data in greater detail than reported in the annual budget request,  including information for some program activities, organizational entities,    and other efforts of interest. For eight areas we selected as examples, IRS officials confirmed that they could provide fiscal year 2012 obligations  data for six and partial information for one. They could not provide  information for one, as shown in table 1.

According to IRS officials, obligations data for identity theft are only  partially available because IRS tracks obligations attributed to identity  theft from its Wage and Investment fund center, which handles most of its  identity theft workload. However, IRS does not track identity theft-related  obligations incurred by other IRS business units. According to a senior  official, IRS plans to establish a Servicewide internal order code for  identity theft at the beginning of fiscal year 2014 because it has become a  long-term priority. Officials said they were not able to provide fiscal year  2012 obligations data for the offshore voluntary disclosure program  because they had not established a mechanism to track it (in part  because the program was operated as a short-term effort in the past and,  according to officials, has only recently been made permanent.) IRS has  not decided if it will track obligations for the offshore voluntary disclosure  program in the future.

According to IRS officials, IRS obligations data for program activities,  organizational entities, and other efforts of interest have some limitations.  For example, the data do not include indirect costs, including costs  associated with IRS-wide functions like human capital management and  procurement. In addition, obligations associated with IT are tracked  separately from non-IT costs in IRS’s financial management system. For  example, non-IT costs for merchant card and basis matching are tracked  separately from the related Information Reporting and Document  Matching (IRDM) IT system. Furthermore, organizational entities and  other efforts of interest are not discrete. Obligations can be analyzed in  different ways, such as from an organizational perspective or a program  perspective. Different analyses should not necessarily be summed  together because they may use different perspectives and, when  considered together, might result in overlaps or gaps. For example,  organizational entities and other efforts of interest have different  perspectives where obligations may be counted towards either. For  instance, obligations for the Wage and Investment fund center—an  organizational entity—may overlap with related efforts of interest, such as  identity theft. Users of IRS obligations data should be cognizant of these  limitations.

section_title: Funding Streams for Obligations Data Vary in Complexity
paragraphs: IRS’s obligations data show how the elements of IRS’s budget  formulation and budget execution structures described in figures 1 and 2  interact, and how those relationships vary in complexity. The data  demonstrate the funding streams for IRS’s obligations: they show which  appropriation accounts, budget activities, and program activities in IRS’s  budget formulation structure received appropriated funds, as well as  which fund centers within IRS’s budget execution structure managed and  distributed the funds. Some fund centers in IRS’s budget execution  structure receive appropriations from a relatively small number of  appropriations accounts, budget activities, and program activities in IRS’s  budget formulation structure. For example, as shown in figure 3, IRS  obligated about $240 million from the Appeals fund center in fiscal year  2012. While most Appeals fund center resources come from the Appeals  program activity, it also receives funding from other parts of IRS’s budget  formulation structure, including funds from the International exams  program activity.

Obligations data for organizational entities and other efforts of interest  can also have a more complex relationship to IRS’s budget formulation  structure than the Appeals example shown above. For example, in fiscal  year 2012 the Wage and Investment fund center received funding from 3  of IRS’s 4 appropriations accounts, 5 of its 9 budget activities, and 23 of  its 83 program activities (see figure 4). In addition, the ease with which  IRS can compile obligations data varies: it can be more difficult for IRS to  compile obligations data for programs with a more complex relationship to  its budget formulation and budget execution structures.

section_title: New Budget Formulation Process Identifies Priorities and Reduces Some Work, but Guidance is Insufficient
paragraphs: For fiscal year 2014, IRS implemented a new, pre-selection budget  formulation process to provide senior leadership with the opportunity to  screen, prioritize, and select funding proposals before business units  prepare detailed business cases. However, we found that in some  instances the information was incomplete. Previously, business unit staff  and subject matter specialists developed detailed business cases for  each proposed initiative. Business cases include detailed narrative  descriptions, multi-year cost estimates, and account breakouts. IRS  budget officials told us the new process reduces work substantially for  business units, since staff no longer need to develop extensive  information for each proposal; instead, they only develop full information  for proposals approved by senior leadership.

The new pre-selection process requires business unit staff to prepare  selective, consistent information utilizing templates. (See appendix III for  a sample template.) Templates include high level summary information on  the purpose of the initiative, the amount of additional funds and FTEs  requested, and the estimated impact of the initiative. Management  reviews the templates and identifies a preliminary list of approved  initiatives. Next, approved initiatives are communicated to business units  via a decision document, along with any suggested changes in scope,  such as combining initiatives or changing requested FTE or dollar levels.  After preliminary approval, business unit staffs prepare detailed business  cases for approved initiatives. process.

Business cases may ultimately be included in the budget request.

section_title: IRS Identified Potential Savings in Its Base Budget
paragraphs: The fiscal year 2014 budget request for IRS shows proposed savings and  efficiencies in its base budget in several areas totaling over $217 million  as shown in table 2. Some of IRS’s expected fiscal year 2014 savings  are anticipated to be achieved through operational changes, such as  shifting funds to automate processes and streamlining or consolidating  operations and functions to make them more cost-effective.

IRS’s 2014 fiscal year budget includes the following savings and  efficiencies:

Realizing Personnel Savings: Personnel savings are mainly the  result of staff attrition and hiring restrictions.

Reducing IT Infrastructure: Examples of IT infrastructure changes  include providing improved data storage capacity, updating computer  servers to be more efficient, adopting common technology platforms  and a more efficient telecommunications infrastructure, and changing  IT contracting practices. For example, IRS is in the process of  implementing virtual computer servers for data storage. Also, the IRS  is implementing new technologies for sharing computer services  across the agency.

Capturing Savings from Space Optimization: IRS has reduced (or  plans to reduce) its office inventory, having selected 123 of its 648  offices to be closed, consolidated, or reduced. These rental savings  are the result of attrition, hiring restrictions, and changes in working  environments (such as increased telework and development of  workspace standards that decrease individual office size). Space  optimization savings require a one-time investment of $37.5 million to  build out new and consolidated space and relocate employees,  resulting in expected future rent savings of $76.7 million annually  ($39.2 million net).

Funding BSM: BSM savings represent differences in projected costs  of IT operations from one year to the next, including implementation  costs related to the Current Customer Account Data Engine 2;  Modernized e-File; Core Infrastructure; and Architecture, Integration,  and Management.  Implementing Human Capital Efficiencies: Administrative efficiency  efforts include the consolidation of employment activities and  modifications to training programs. For example, IRS reduced the  number of Employment Hiring Centers from 9 to 3. IRS also  streamlined processing of requests for personnel-related changes,  such as salary increases, transfers, or leaves of absence. In addition,  the Employment Operations Unit automated its hiring process to  enable electronic completion of pre-hire forms. Some training  programs are being modified from classroom training to webinars,  reducing travel costs and allowing more employees to attend.

Achieving e-File Savings: These savings result from labor  reductions related to increased use of electronic filing of tax returns  and corresponding decrease in paper returns.

section_title: IRS Developed New Revenue Protection and Revenue Enhancement ROI Projections
paragraphs: In its fiscal year 2014 congressional justification, IRS included projected  ROI for 10 enforcement initiatives, including two initiatives that used new  approaches in estimating potential ROI: revenue protection and revenue  enhancement. According to agency budget officials, IRS developed the  new ROI methodologies because it did not have enough historical data on  these initiatives to use the same methodology used for other initiatives.  Since fiscal year 2008, IRS has included ROI projections for new  revenue-generating enforcement initiatives in its congressional  justification. IRS has generally calculated ROI projections for revenue  generating initiatives based on the amount of additional tax collected. For  each initiative, IRS calculated an estimate of the potential revenue  collected by requested FTEs using 10 years of historical data. Because  10 years of historical data were not available for the revenue protection  and revenue enhancement initiatives, IRS developed new methodologies.

For example, the fiscal year 2014 budget for IRS requests $101.1 million  for an “Improve the Identification and Prevention of Refund Fraud and  Identity Theft” initiative. According to IRS, if funded, the initiative would  protect revenue because these activities would identify fraudulent returns  related to identity theft and resolve cases prior to issuing a refund. To  estimate the amount of projected revenue that would be protected, IRS  determined the dollar amount of erroneous refunds detected per FTE  from the beginning of the 2012 tax filing season through August of that  year. As shown in figure 6, IRS estimated the ROI for this initiative to be  6.2 to 1 in fiscal year 2014, rising to 14.4 to 1 in fiscal year 2016.

The fiscal year 2014 budget for IRS also requests $51.7 million for a  “Leverage Data to Improve Case Selection” initiative. According to IRS, if  funded, this initiative would enhance revenue by improving technology  that would enable IRS to improve case selection, issue identification, and  enforcement case treatment. This technology would also allow IRS to  adapt quickly to changing taxpayer behavior and tax code misuse. To  estimate the additional amount of projected revenue that would be  generated by this initiative, IRS studied the impact of using certain  electronically filed data in a new way to examine selected tax returns and  found that it could help classifiers detect more noncompliance. Based  on the study’s findings, IRS estimated that using certain electronically  filed data would increase examination assessments for taxpayers at all  income levels, and used that estimate to calculate the amount of  additional revenue that could be collected as a result of the “Leverage  Data to Improve Case Selection” initiative. As shown in figure 7, IRS  estimated an initial cost of $52 million in fiscal year 2014 followed by an  estimated ROI of 1.3 to 1 in fiscal year 2015 and 1.5 to 1 in fiscal year  2016.

section_title: IRS Significantly Improved Its PPACA Cost Estimate, but Did Not Publicly Report Investment Information for the Fiscal Year 2014 Budget Request
subsections: section_title: Updated PPACA Cost Estimate Shows Significant Progress, but a Few Areas for Improvement Remain
paragraphs: In December 2012, IRS updated the PPACA cost estimate as part of its  on-going practice to refine the cost estimate and address our prior  recommendation. The updated cost estimate reflects best practices to a  much greater extent, as shown in table 3. Unlike previous versions, the  updated cost estimate shows significant progress, as it reflects the full- cycle cost of the program, which will total $1.89 billion from fiscal year  2010 through 2026. With this information, budget decision makers can  see the amount IRS plans to spend on the multi-year PPACA effort in a  particular year, as well as an estimate of costs that remain to be funded in  future years. According to the GAO Cost Guide, a reliable cost estimate  must be comprehensive, well documented, accurate, and credible. (See  appendix IV for our full assessment of the updated PPACA cost  estimate.) In June 2012, we reported that IRS’s cost estimate for PPACA  did not fully meet best practices for a reliable cost estimate.

When enacted, PPACA contained 47 tax-related provisions that IRS is  responsible for implementing with effective dates through 2018. Meeting  these statutory requirements has required a significant IT investment in  new data models, databases, and IT systems and operations support.  IRS’s PPACA cost estimate is important in determining and  communicating a realistic view of a program’s likely cost and schedule  outcomes that can be used to plan the work necessary to develop,  produce, install, and support the program. The cost estimate is also  integral to establishing and defending budget requests: it provides context  for the $440 million requested for IRS to address PPACA requirements in  fiscal year 2014.

A few areas remain where IRS could continue to improve the reliability of  the cost estimate to better meet best practices outlined in the GAO Cost  Guide. We found that the cost estimate only partially met best practices  for accuracy and credibility. Specifically, we identified three deficiencies in  the accuracy of the cost estimate. First, the cost estimate was not fully  adjusted for inflation. IRS adjusted future costs for inflation, and  documented inflation rates, but reported past costs in current year dollars.  Because sunk costs were not adjusted for inflation, their contribution to  the cost estimate is higher than it should be. In August 2013, the IRS  Chief Financial Officer told us that, as a result of this finding, IRS has  already revised the next update to the PPACA cost estimate to adjust  sunk costs for inflation. Second, IRS included actual sunk costs in the  estimate, but it did not use earned value management—a process for  capturing actual costs and comparing them to estimated costs. Earned  value management would enable IRS to continuously update the estimate  to reflect actual costs. Third, the estimate shows how it varies from a  previous estimate, but it does not explain factors behind the variance. If  the reasons for cost variances are not captured, estimators cannot  identify lessons learned that would improve future estimates.

We also identified three deficiencies in the credibility of the cost estimate.  First, IRS conducted a sensitivity analysis on two cost drivers (a  sensitivity analysis examines the effects on changing assumptions and  estimating procedures to highlight elements that are cost-sensitive).  However, it is not clear how the two cost drivers were selected for  analysis or whether IRS identified the cost elements that were the most  sensitive to change. Second, IRS developed multiple risk management  plans and conducted a risk and uncertainty analysis, but it is unclear how  the risk management plans were applied to address the risks identified in  the cost estimate. In addition, IRS incorrectly treated the total funding risk  for the entire program as equal to the sum of the risks of individual  elements. A proper risk and uncertainty analysis is necessary to correctly  assess the variability in the cost estimate due to program risks. Third, IRS  did not obtain a second cost estimate. The GAO Cost Guide specifies that  producing two cost estimates that are independent of one another is a  best practice because the second cost estimate can validate the first and  provide an unbiased test of whether the original cost estimate is  reasonable.

We discussed each of these deficiencies with IRS officials, who stated  they gained a better understanding of the criteria in the GAO Cost Guide  based on our meeting. Because it provides a sound basis for informed  investment decision making, realistic budget formulation, and  accountability for results, developing a reliable cost estimate that meets  best practices is critical to PPACA’s success.

section_title: IRS Did Not Report PPACA Investment Information on the OMB Dashboard Website
paragraphs: Although the IT systems used to implement PPACA (which IRS refers to  as the ACA IT investment) meet the Department of Treasury’s (Treasury)  definition of a major investment, IRS reported the investment as a non- major investment in fiscal year 2014. According to agency officials, IRS  did not have time to prepare the information that is typically reported for  major investments in the President’s fiscal year 2014 budget request.  Unlike major investments, non-major investments are not included for  public reporting on the OMB IT Dashboard and are also not required to  be included in the “Capital Asset Summary,” referred to as an Exhibit  300.

In prior years, IRS’s portion of the ACA IT investment was included with  related investments that were managed and reported by the Department  of Health and Human Services (HHS). HHS reported ACA IT investment  information on the Dashboard. In January 2013, at the end of the fiscal  year 2014 budget formulation cycle, IRS’s portion of the ACA IT  investment was split from HHS’s portion and IRS assumed responsibility  for reporting on its portion. The Clinger-Cohen Act of 1996 requires OMB  to establish processes to analyze, track, and evaluate the risks and  results of major capital investments in information systems and report to  Congress on the net program performance benefits achieved as a result  of these investments. In addition, OMB’s Capital Programming Guide  defines major acquisitions to include capital assets that require special  management attention because of high costs, high risk, or a significant  role in the administration of agency programs. According to the Treasury  budget director and IRS officials, the ACA IT investment is expected to be  reported as a major investment in the fiscal year 2015 budget request.  IRS and Treasury officials also told us they plan to include an Exhibit 300  and report ACA IT information on the OMB Dashboard.

Not reporting information on IRS’s ACA IT investment on the Dashboard  or in an Exhibit 300 makes it more difficult to monitor and limits  transparency. As a result, information about the implementation of  PPAA—such as the individual projects that comprise the investment,  evaluation history, current Exhibit 300 and cost and schedule variances— is not as readily available to Congress and the general public.

section_title: IRS Expanded Information Reported on Its Major IT Investments in the Fiscal Year 2014 Budget Justification, but Additional Information Would Be Useful
paragraphs: In the fiscal year 2014 budget justification, IRS included new, useful  information on its major IT investments that was not included in prior  budget justifications, such as life-cycle costs, projected useful life of the  current asset, anticipated benefits, and how performance will be  measured. This additional information is a significant enhancement to  information provided in prior budget justifications, and provides decision  makers with more context on IRS’s portfolio of IT investments. However,  IRS does not provide information on IT investments in a consolidated  format. IT is a significant portion—about 20 percent—of the total IRS  budget request for fiscal year 2014. It includes approximately $2.6 billion  to fund 18 major IT investments and 131 non-major investments. (See  appendix V for a summary of the major IT investments.)

Redacted Exhibit 300s do not include sensitive data, such as estimated obligations for  future budget years, names and contact information, and operational risks. in the Exhibit 300, such as the projected useful life of the current asset.  However, certain other information (such as the start date, funds  obligated through the prior fiscal year, and the number of FTEs  represented by current costs) is only available in the Exhibit 300.  Additional information (such as percent of life-cycle costs obligated  through the prior fiscal year) is not available in either report, but can be  calculated with information contained in the Exhibit 300 and budget  justification. See table 4 for a general description of the type of  information included in the budget justification and Exhibit 300.

Because different information exists in different documents, decision  makers must access multiple public documents to gain a full  understanding of IRS’s IT priorities. For example, if a decision maker was  interested in the Modernized e-File (MeF) IT investment, the fiscal year  2014 budget justification would show that the projected useful life of the  asset extends to 2019, however, to know the start date of the MeF  investment—2001—the decision maker would also need to access the  Exhibit 300. Likewise, the decision maker would see that the fiscal year  2014 budget justification shows the estimated life-cycle costs for MeF to  be $575 million, however, to know how much has been obligated for the  investment from the start date through fiscal year 2012—$304 million— the decision maker would have to access the Exhibit 300 and calculate  the amount of funding obligated across prior fiscal years.

Consolidating key budget and performance information on major IT  investments in one budget document (such as the congressional  justification) would ensure decision makers have comprehensive, easy to  understand information on major IT investments. In particular,  consolidating information for complementary data elements (such as start  date and projected useful life of the current asset, and amount of funding  obligated through prior fiscal years and life-cycle costs) would provide  useful context to understand IRS’s progress in implementing long-term IT  investments. IRS officials said they can consolidate this information for  ease of review.

GAO’s Standards for Internal Control in the Federal Government states  that information should be communicated in a format that enables  management and others to carry out their oversight responsibilities.

Further, the GPRA Modernization Act of 2010—which can serve as a  guide to leading practices for planning at lower levels within federal  agencies—requires that agencies consult with relevant committees when  developing or making adjustments to their strategic plans and agency  priority goals. Consulting with relevant committees regarding IT  investments would provide IRS with an opportunity to share performance  information and confirm that various committees are getting the types of  performance information needed. Congressional staffs have requested  comprehensive, easy to understand information on IRS’s IT investments:  providing it in a comprehensive, consolidated format could provide them  with better information to guide decisions. Congress directed IRS to  include a summary of cost and schedule performance information for its  major IT investments in its budget justification for fiscal year 2013; in  addition, starting in March 2012, IRS was required to submit  a report  after every quarter with specific information on IRS’s selected major IT  investments, including a “plain English” explanation of the cost and  schedule for the previous three months and the cost and schedule  performance for the upcoming three months. IRS has been submitting  these reports and briefing the Appropriations Committees and other  congressional stakeholders. Despite the increased information in the  budget justification and the new quarterly report, key budget and  performance information on all of IRS’s major IT investments remains in  various budget documents. Until such data is consolidated, it is less  accessible to congressional stakeholders.

section_title: IRS Implemented Six of Our Nine Prior Recommendations to Improve the Budget Presentation and Aid Decision Making
paragraphs: Since June 2012, IRS implemented six recommendations made in our  prior reviews of its budget justification documents. Three of the  implemented recommendations resulted in additional information in the  budget request, such as actual ROI and linking funding requests for new  initiatives to strategic goals and objectives. Enhanced information in the  budget request can aid decision making and provide context to Congress  regarding how current operations and requests for new funding support  IRS priorities. Table 5 summarizes the recommendations implemented by  IRS.

As shown in table 6, IRS officials agreed with two of the three budget  related recommendations that remain open. IRS initially disagreed with  our recommendation to modify its funding request for new hires.  However, in August 2013, IRS Corporate Budget officials told us that IRS  is considering options to implement the recommendation, including  possibly describing in the operating plan how it plans to use available  funds not needed for new hires in the first year.

section_title: Conclusions
paragraphs: IRS has taken important steps to include new and useful information in its  budget justification to aid Congress and other stakeholders, including new  information on actual ROI and enhanced information on major IT  investments. In addition, IRS made significant improvements to the  PPACA cost estimate, which is integral to accurately informing budget  decision makers of the anticipated long-term costs for both  implementation and administration of the new health care program.  Furthermore, IRS’s new pre-selection process for determining which  initiatives to request funding for was reported by officials to be a more  efficient method for commencing budget formulation, although enhanced  guidance could make it more effective. We also identified some other  actions that could improve the budget request and aid Congress in  decision making, including (1) improving the accuracy and credibility of  the PPACA cost estimate in future updates because it provides the basis  for informed investment decision making, realistic budget formulation, and  accountability for results, (2) ensuring the ACA IT investment is publicly  reported to increase transparency and (3) reporting consolidated  information on major IT investments to make the information more  accessible.

section_title: Recommendations for Executive Action
paragraphs: To enhance the budget process and to improve transparency, we  recommend the Acting Commissioner of Internal Revenue take the  following four actions:  Improve guidance given to business units for the pre-selection budget  formulation process, emphasizing the importance of information on  the estimated impact—qualitative or quantitative—of proposed budget  initiatives.

Improve the accuracy and credibility of future updates to the PPACA  cost estimate by taking the following actions to more closely follow  best practices outlined in the GAO Cost Guide:

Use earned value management to capture actual costs and use  them as a basis for future updates.

Explain why variances occurred between the current estimate and  previous estimates.

Document how cost drivers are selected for future sensitivity  analyses.

Conduct future risk and uncertainty analyses consistent with best  practices, and develop and document plans to address risks.

Validate the original cost estimate by preparing a second,  independent cost estimate.

Publicly report the ACA IT investment as a major investment on the  OMB IT Dashboard and the fiscal year 2015 budget request, including  standard cost, schedule, and performance information.

Report key data on major IT investments in one consolidated  document, such as the congressional justification, in consultation with  congressional stakeholders.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Acting Commissioner of the IRS  for his review and comment. We received an email on September 18,  2013 from the Chief Financial Officer, which included an attachment that  provided the agency’s comments to our recommendations. This  attachment is reprinted in appendix VI. In response to our draft report, the  Chief Financial Officer stated that IRS agreed with three of our four  recommendations and identified actions planned and taken to address  them. For example, IRS agreed to include additional data on its major IT  investments in the congressional justification, such as actual obligations  for the investment to date. IRS agreed with the majority of the actions  associated with our fourth recommendation on improving the accuracy  and credibility of future updates of the PPACA cost estimate. IRS  disagreed with two actions contained in our fourth recommendation.  Specifically,  IRS disagreed with our recommended action to use earned value  management, a process that would enable IRS to continuously update  the cost estimate to reflect actual costs.  IRS stated that earned value  management is not part of its current program management  processes because the cost and burden to use earned value  management outweigh the value added. We disagree with IRS’s view  as to the benefits of earned value management. GAO has found that  programs that establish good earned value management systems  realize better project management decision making and fewer cost  and schedule overruns. While there is an upfront investment to  establish the earned value management system, there are long-term  benefits that go beyond the individual project, such as fostering  accountability, improving insight into program performance, and  providing objective information for managing the program. Further, the  OMB Capital Programming Guide states that earned value  management is a critical component of risk management for major  investments.  IRS also disagreed with our recommended action to validate the  PPACA cost estimate by preparing a second, independent cost  estimate. IRS stated that the cost and burden of having an external  organization produce a second, independent cost estimate of the  same scope would outweigh the value added. In addition, IRS stated  that an external organization would lack the knowledge necessary to  produce a reasonable estimate without relying heavily on the IRS  group that produced the first estimate. We disagree with IRS’s view.  As reflected in the GAO Cost Guide, GAO has found that producing a  second, independent cost estimate is considered one of the best and  most reliable methods for validating a cost estimate. Without a  second, independent cost estimate, decision makers lack insight into  a program’s potential costs and may lack confidence that the estimate  is reasonable and costs described in the first estimate can be  achieved. While preparing a second cost estimate that is independent  of the first cost estimate requires additional resources, it is generally  based on the same detailed technical and procurement information.  Furthermore, an independent cost estimate does not need to be  conducted by an external organization, but the estimation team should  be outside the acquisition chain and have nothing at stake with regard  to program outcome or funding decisions. The major benefit of a  second, independent cost estimate is that it provides an objective and  unbiased assessment of whether the original estimate can be  achieved; reducing the risk that the program will proceed underfunded  or costs will exceed its value.

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 Acting Commissioner of Internal  Revenue, the Secretary of the Treasury, and the Chairman of the IRS  Oversight Board. Copies are also available at no charge on the GAO web  site at http://www.gao.gov.

If you or your staffs have further questions or wish to discuss the material  in this report further, please contact me at (202) 512-9110 or  mctiguej@gao.gov. Contact points for our offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made major contributions to this report are listed in  appendix VII.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We were asked to review the President’s fiscal year 2014 budget request  for the Internal Revenue Service (IRS). The objectives of this report were  to (1) describe IRS’s capacity to report fiscal year 2012 obligations and  full-time equivalent (FTE) data for program activities, organizational  entities, and other efforts of interest; (2) assess IRS’s process and the  type of information used to prioritize and select new program initiatives;  (3) describe proposed base budget savings; (4) describe IRS’s new  projected return on investment (ROI) methodologies; (5) evaluate steps  IRS took to improve the cost estimate for the Patient Protection and  Affordable Care Act (PPACA) in accordance with GAO’s Cost Estimating  and Assessment Guide and determine the extent to which IRS is  transparently reporting on the Affordable Care Act (ACA) information  technology (IT) investment; (6) summarize IRS’s major IT investments  and assess the type of information available in the congressional  justification; and (7) describe IRS’s progress in implementing our prior  budget-related recommendations.

To describe IRS’s capacity to report fiscal year 2012 obligations and FTE  data, we reviewed documentation related to IRS budget formulation and  budget execution, including IRS’s Financial Management Codes  Handbook, IRS’s organizational chart, and its fiscal year 2014  congressional budget justification. We also interviewed knowledgeable  officials in IRS’s Corporate Budget Office. We selected eight program  activities, organizational entities, and efforts of interest for analysis: (1)  Appeals, (2) Identity Theft, (3) International Exam and Collections, (4)  Merchant Card and Basis Matching and the related Information Reporting  and Document Matching (IRDM) IT system, (5) Offshore Voluntary  Disclosure Program, (6) Online Services, (7) Telephone and  Correspondence Services, and (8) Wage and Investment. We selected  this list based on the following criteria: whether it was included in the  proposed fiscal year 2014 budget initiatives, whether it was the topic of  prior GAO work, and whether the selected list (as a whole) spans most of  IRS’s appropriation accounts and encompasses a range of methods by  which the data can be obtained from IRS’s financial management system.  To determine IRS’s capacity to compile fiscal year 2012 obligations data  for these eight items, we interviewed knowledgeable officials in IRS’s  Corporate Budget Office. From the eight selected program activities,  organizational entities, and other efforts of interest, we selected two  illustrative examples to report fiscal year 2012 obligations data and to  show how IRS’s budget formulation and budget execution structures  interact: Appeals, and Wage and Investment. We selected these two  examples largely to demonstrate the differences in structures. While they  are both fund centers in IRS’s budget execution structure that manage  and distribute funds, Appeals is also a program activity in IRS’s budget  formulation structure and shows a relatively simple relationship between  these structures. In contrast, Wage and Investment is a complex fund  center that receives funding from many segments of IRS’s budget  formulation structure. We assessed the reliability of IRS’s fiscal year 2012  obligations data by reviewing relevant IRS documents, including the  Financial Management Codes Handbook, as well as prior work we  conducted that assesses IRS’s financial statements. We believe that the  data are sufficiently reliable for our purposes. We identified some  limitations, but they do not affect our illustrative use of the data and are  discussed in our report.

To assess IRS’s process and the type of information used to prioritize and  select new program initiatives, we reviewed IRS documents related to its  pre-selection budget formulation process for fiscal year 2014. Documents  included guidance from the IRS Corporate Budget Office and pre- selection templates submitted for review by the taxpayer services and  enforcement business units to senior leadership between November 2011  and May 2012. We analyzed these submissions for completeness against  criteria for budget formulation outlined in OMB Circulars A-94. interviewed IRS officials familiar with the pre-selection process.

Office of Management and Budget, Revised, Guidelines and Discount Rates for Benefit- Cost Analysis for Federal Programs, OMB Circular No. A-94, (Revised October 1992). efficiencies, such as human capital, space optimization, and IT  infrastructure summaries.

To describe IRS’s new projected ROI methodologies (of revenue  protection and revenue enhancement) included in the fiscal year 2014  budget request, we discussed the difference between the new  methodologies and IRS’s other projected ROI calculations with officials in  IRS’s Office of Compliance Analytics and Corporate Budget Office. We  also reviewed a related briefing developed by the Office of Compliance  Analytics that summarizes the extent to which the use of non-transcribed  electronic data impacts the classification of cases.

To evaluate steps IRS took to improve the PPACA cost estimate, we  compared IRS’s updated PPACA cost estimate, completed in December  2012, with the characteristics of a high-quality cost estimate, identified in  the GAO Cost Estimating and Assessment Guide (Cost Guide). Guide identifies four characteristics of a high quality cost estimate. The  cost estimate should be (1) comprehensive, (2) well documented, (3)  accurate, and (4) credible. We calculated the assessment rating of each  criterion within the four characteristics by assigning each an individual  assessment rating as follows: does not meet = 1, minimally meets = 2,  partially meets = 3, substantially meets = 4, and meets = 5. We then  averaged the individual practice scores to determine the overall rating.  We shared our preliminary analysis of the updated PPACA cost estimate  with program officials. When warranted, we updated our analyses based  on the agency’s response and additional documentation provided to us.

See GAO, Cost Estimating and Assessment Guide: Best Practices for Developing and  Managing Capital Program Costs (Supersedes GAO-07-1134SP), GAO-09-3SP  (Washington, D.C.: Mar. 2, 2009). perform our assessment, we used relevant criteria on reporting capital  investment information, including the Clinger-Cohen Act of 1996 and the  OMB Capital Programming Guide.

To summarize IRS’s major IT investments (defined by Treasury as  investments costing $10 million in either current year or budget year, or  $50 million over the 5-year period extending from the prior year through  the budget year +2) and to assess the type of information available in the  congressional justification, we reviewed fiscal year 2013 and 2014  congressional budget justifications, Exhibit 300s—capital asset  summaries—prepared by IRS for major IT investments, as well as IRS  and OMB guidance on preparing those documents, such as the Office of  Management and Budget Guidance on Exhibits 53 and 300—Information  Technology and E-Government. We identified the type of information that  is available across budget documents, in particular key information such  as cost to date, full time equivalents, life-cycle costs, start date and end  date.

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 2014  congressional budget justification and IRS’s Joint Audit Management  Enterprise System (JAMES) reports, which track IRS actions taken to  implement GAO recommendations. We then determined which  recommendations were implemented.

We conducted our work in Washington, D.C., where key IRS officials  involved with the budget and IT systems are located.

We conducted this performance audit from October 2012 to September  2013 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: Non-Interactive Version of Figure 1: IRS’s Budget Formulation Structure
subsections: section_title: Budget activity Pre-filing taxpayer assistance and education

section_title: Filing and account services

section_title: Investigations

section_title: Exam and collections

section_title: Budget activity Regulatory

section_title: Infrastructure

section_title: Shared services and support

section_title: Budget activity Information services

section_title: Information technology investments

section_title: Appendix III: Figure 8: Pre-selection Budget Formulation Process—Sample Template

section_title: Appendix IV: Reliability of Patient Protection and Affordable Care Act Cost Estimate
paragraphs: Figures 9 through 12 outline our assessment of the extent to which IRS’s  updated, December 2012 Patient Protection and Affordable Care Act  (PPACA) cost estimate meets best practices. This information is repeated  in table 7, following the graphics.

section_title: Appendix V: Summary of IRS’s Major Information Technology (IT) Investments
paragraphs: Total  obligations  through  fiscal  year2012  (in millions)

Lifecycle  costs  (in millions)

Total  obligations  through  fiscal  year2012  (in millions)

Lifecycle  costs  (in millions)

Total  obligations  through  fiscal  year2012  (in millions)

Lifecycle  costs  (in millions)

Lifecycle  costs  (in millions)

Total  obligations  through  fiscal  year2012  (in millions)

section_title: Appendix VI: Comments from the Internal Revenue Service

section_title: Appendix VII: 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;  Remmie Arnold, Amy Bowser, Jennifer Echard, Emile Ettedgui, Mary  Evans, Chuck Fox, Paul Middleton, Donna L. Miller, Edward Nannenhorn,  Karen O’Conor, Sabine Paul, Laurel Plume, Karen Richey, Erinn L.  Sauer, Cynthia Saunders, and Robert Yetvin made major contributions to  this report.


Question-summary annotations: questions: question: How has the IRS changed its PPACA cost estimate?
answer: IRS significantly improved its Patient Protection and Affordable Care Act (PPACA) cost estimate.
child_questions: question: What is distinct about the December 2012 estimate?
answer: In particular, the December 2012 estimate is more comprehensive, reflecting the full life-cycle cost of the program--estimated at $1.89 billion for fiscal year 2010 through 2026.

question: What areas of improvement remain?
answer: A few areas of improvement remain, primarily regarding the accuracy and credibility of the cost estimate.
child_questions: question: What specific areas could use improvement in cost estimates?
answer: For example, IRS showed how the December 2012 estimate differed from the previous estimate, but did not explain the factors that resulted in the variances. In addition, IRS did not obtain a second cost estimate that could be used to assess the reasonableness of the $1.89 billion estimated program costs.

questions: question: Why should the IRS have reported IT systems for PPACA?
answer: Although the information technology (IT) systems for PPACA met dollar thresholds (as outlined in the Department of Treasury's guidance) as a major investment for public reporting, IRS did not report this as such.
child_questions: question: Why did the IRS not include such information in their report?
answer: Officials told GAO they did not have time to prepare the information for the fiscal year 2014 budget justification, but plan to do so for fiscal year 2015.

question: What are the consequences of this omission?
answer: Until IRS publicly reports the IT systems for PPACA as a major investment, transparency about these systems' implementation and administration is limited.

questions: question: What kinds of information did IRS leave out in its budget justification?
answer: Although IRS included new and useful information on its major IT investments in the budget justification (such as life-cycle costs) other important information (such as the start date and percent of life-cycle costs obligated) is reported elsewhere or must be calculated.
child_questions: question: Why would IRS officials consolidate this information?
answer: IRS officials said they could consolidate this information for ease of review.
child_questions: question: How would consolidation of data help Congress?
answer: Consolidating key budget and performance data would ensure Congress has comprehensive, easily accessible information on major IT investments to guide decisions.

questions: question: Why was GAO asked to review the IRS's budget?
answer: Because of the size of IRS's budget and the importance of its programs, GAO was asked to review the fiscal year 2014 budget request.
child_questions: question: How did GAO conduct their review?
answer: To address these objectives, GAO reviewed the fiscal year 2014 budget justification, compared the updated PPACA cost estimate to GAO's Cost Estimating and Assessment Guide, and interviewed IRS Corporate Budget officials.

question: When did GAO report their preliminary findings?
answer: In April and May 2013, GAO reported preliminary observations on IRS's budget.
child_questions: question: What does this report assess?
answer: Among other things, this report assesses how IRS prioritizes new initiatives; steps IRS has taken to improve the PPACA cost estimate and the reporting transparency of the related IT investment; and the type of information available in the budget justification about major IT systems.