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

Letter

Background

IRS Budget Presentation

The congressional budget justification for IRS presents funding and FTE information at two levels: (1) appropriation account and (2) budget activity. In addition, it provides descriptions of program activities within each budget activity. IRS has four appropriation accounts:

Enforcement. This account provides funding for the examination of tax returns, both domestic and international; administrative and judicial settlement of taxpayer appeals of examination findings; technical rulings; monitoring of employee pension plans; determination of qualifications of organizations seeking tax-exempt status; examination of tax returns of exempt organizations; enforcement of statutes relating to detection and investigation of criminal violations of the internal revenue laws; identification of underreporting of tax obligations; securing of unfiled tax returns; and collecting unpaid accounts.

Operations Support. This account provides funding for overall planning, direction, and support for the IRS, including shared service support related to facilities services, rent payments, printing, postage, and security. This appropriation funds headquarters policy and management activities such as corporate support for strategic planning; communications and liaison; finance; human resources; equity, diversity and inclusion; research and statistics of income; and necessary expenses for information systems and telecommunication support, including development, security, and maintenance of IRS information systems.

Taxpayer Services. This account provides funding for taxpayer service activities and programs. This includes printing forms and publications, processing tax returns and related documents, offering filing and account services, ensuring the availability of taxpayer assistance, and providing taxpayer advocacy services.

Business Systems Modernization. This account provides resources for the planning and capital asset acquisition of IT to modernize the IRS business systems.

Budget activities divide appropriation accounts into additional functions. For example, the Enforcement appropriation is broken into three budget activities: Investigations, Exam and Collections, and Regulatory. Each budget activity, in turn, has multiple program activities. For example, Exam and Collections has 18 program activities.

The congressional justification presents how budget resources could be allocated to appropriation accounts. IRS is restricted from reprogramming funds within appropriation accounts without committee approval if the reprogramming will augment existing programs, projects, or activities (PPA) in excess of $5 million or 10 percent, whichever is less. IRS refers to its PPAs as “budget activities.” IRS generally notifies Congress if it expects to reprogram funds from one budget activity to another. However, IRS is not restricted from shifting resources between program activities, which are activities within a budget activity and not subject to reprogramming restrictions. Further, while IRS cannot transfer resources from one appropriation account to another without specific statutory authority to do so, IRS could shift resources between any of the 18 program activities within the Exam and Collection budget activity without Congressional approval or notification.

Within the congressional justification, IRS also details its strategic goals and objectives for the agency. According to the fiscal year 2015 congressional justification for IRS, the IRS strategic plan guides program and budget decisions and supports the Department of the Treasury Fiscal Year 2014 to 2017 Strategic Plan and the Agency Priority Goal of expanding the availability and improving the quality of customer service options.

The congressional justification also details information on requested program increases (new program initiatives). The information includes why the funds are needed, how they will be used, and the number of staff by position needed to do the work. Some of the new program initiatives also include projected return on investment (ROI) calculations—the projected additional revenue collected, divided by the projected cost. For IRS, projected ROI is an estimate of how the agency expects a program initiative to perform. IRS defines three types of ROI:

Revenue producing. The initiative yields direct, measureable results through enforcement activities.

Revenue protecting. The initiative prevents the issuance of fraudulent refunds to persons posing as a taxpayer and resolves issues prior to issuing a refund.

Revenue enhancing. The initiative leads to improved revenue collection through improvements in case selection, issue identification, and enforcement case treatment.

In recent years, some of the new program initiatives have been predicated on a program integrity cap adjustment. Congress passes these adjustments to allow additional funding above discretionary spending limits for certain activities that are expected to generate benefits that exceed cost. Of the 22 initiatives in the IRS fiscal year 2015 budget request, 17 are predicated on a program integrity cap adjustment.

Implementation of Major New Laws

IRS continues to implement four major new laws passed in recent years:

PPACA. This law reforms the private insurance market and expands health coverage to the uninsured. IRS is responsible for implementing new provisions including new taxes, tax credits, and information reporting requirements.

Merchant card reporting. This law requires payment settlement entities (e.g., banks) to report fiscal year information and the gross amount of reportable payment transactions (i.e., payment card and third party network transactions) to IRS.

Cost basis reporting. This law requires investment brokers to report the adjusted cost basis for certain publicly traded securities and whether a gain or loss is short or long-term.

Foreign Account Tax Compliance Act (FATCA). This law adds reporting and other requirements relating to income from assets held abroad by: (1) requiring foreign financial and nonfinancial institutions to withhold 30 percent of payments made to such institutions by U.S. individuals, unless such institutions agree to disclose the identity of such individuals and report on their bank transactions, and (2) denying a tax deduction for interest on non-registered bonds issued outside the United States.

IRS Has Taken Some Steps to Address Declining Budgets in the Short-Term, but Lacks a Long-Term Strategy

IRS Has Absorbed Substantial Budget Cuts in Recent Years

IRS’s appropriations have ranged from a low of $10.2 billion in fiscal year 2005 to a high of $12.1 billion in fiscal year 2010. The fiscal year 2010 high was in part a result of a program integrity cap adjustment of $890 million. As we have previously reported, IRS’s budget declined approximately $900 million between fiscal years 2010 and 2014. These cuts reduced IRS’s budget to below fiscal year 2009 funding levels. The largest budget reduction ($618 million) occurred in fiscal year 2013 because of sequestration ($594 million) and a 0.2 percent rescission ($24 million). In fiscal year 2014, IRS’s budget remained essentially flat, with an increase of $92 million for the improvement of identification and prevention of refund fraud and identity theft, and international and offshore compliance issues. For fiscal year 2015, the President requested $12.5 billion for IRS, an increase of 10.5 percent ($1.2 billion) over fiscal year 2014 appropriations. See figure 1.

Staffing declined by more than 10,000 FTEs between fiscal years 2010 and 2014, which reduced IRS’s total FTEs to below fiscal year 2009 levels. For fiscal year 2015, the President requested an increase of about 7,000 FTEs over fiscal year 2014, which would bring IRS above fiscal year 2012 levels. See figure 2.

IRS Performance Declined in Some Areas

Amidst these budget reductions, IRS’s performance has declined in Enforcement and Taxpayer Services. IRS officials anticipate continued declines in fiscal year 2015. As shown in figure 3, IRS lowered its return examination and collection coverage targets. For example, the original audit coverage target for individual examinations was 1 percent for fiscal year 2014, but was lowered to 0.8 percent in the fiscal year 2015 congressional justification.

IRS’s performance in assisting taxpayers has also suffered, including telephone and correspondence services. Between fiscal years 2009 and 2013, telephone level of service—the percentage of callers seeking live assistance and receiving it—fluctuated between 61 percent and 74 percent. As of April 19, 2014, after the filing season ended, fiscal year 2014 telephone level of service was 67 percent. In addition, the average amount of time a taxpayer had to wait to talk to a telephone assistor increased since fiscal year 2009—from 8.8 minutes to 17.0 minutes, as of April 19, 2014. Moreover, from fiscal years 2009 through 2013, overage correspondence—paper correspondence to which IRS has not responded within 45 days of receipt—increased from 25 percent to 47 percent. However, according to IRS, the 2014 filing season was relatively smooth, which IRS attributes to reduced call volume and fewer tax law changes.

IRS attributes performance declines to sequestration and furloughs. For example, the number of individual, high-income, and business return audits fell from fiscal year 2012 to 2013 because fewer staff were available to conduct audits. Similarly, reports by the IRS Oversight Board and the National Taxpayer Advocate (NTA) attribute performance declines in part to reduced funding.

IRS Faces an Increased Demand for Some Services

As staffing fell, IRS’s workload increased in some areas as a result of statutory mandates and priority programs. For fiscal year 2014, IRS allocated 9 percent of its FTEs to these mandates and programs, including those to implement four new laws—PPACA, merchant card reporting, cost basis reporting, and FATCA. In addition, because instances of identity theft are more frequent, IRS has significantly increased resources devoted to refund fraud, which includes identity theft.

Since IRS began tracking refund fraud in fiscal year 2011, it has more than quadrupled the numbers of FTEs allocated to refund fraud, from 1,018 in fiscal year 2011 to 4,146 FTEs in fiscal year 2014 (about 5 percent of its total workforce). Table 1 shows the shift in FTEs to legislative mandates and priority programs.

IRS Has Taken Some Steps to Address Budget Cuts

To reduce spending to address sequestration and other budget cuts, IRS has taken steps that include the following key efforts:

Staff attrition and furloughs. IRS absorbed the majority of its budget cuts through staff attrition and furloughs. Of the $567 million in savings realized in fiscal year 2013, $311 million resulted from attrition, hiring freezes, and furloughs. IRS implemented an exception- only hiring freeze in December 2010. In fiscal year 2013 alone, FTEs decreased by more than 2.7 percent—2,978—from fiscal year 2012 as a result of attrition, according to IRS. Of these savings, IRS generated $88.5 million from 3 furlough days.

Reduced travel and training. IRS substantially reduced employee training and related travel. Since fiscal year 2010, IRS reduced training costs by 83 percent and training-related travel costs by 87 percent by limiting employee travel and training to mission-critical projects. From fiscal years 2009 through 2013, IRS reduced the amount it spent per employee on training from $1,600 to $200, according to data provided by IRS. Reductions of this magnitude are not sustainable, according to IRS officials. For fiscal year 2013, IRS reported a savings of $56.2 million by reducing agency-wide, non- technical training and non-case related travel. IRS attributes the savings to a greater use of technology and deferral of some standard training. IRS noted that in fiscal year 2013 the training budget was cut so the funds would be available to minimize furlough days and thereby maintain service to taxpayers.

E-file savings. It costs IRS much less to process electronic returns than paper returns. IRS reported receiving 3.5 million fewer paper returns in fiscal year 2013 and 4.2 million more electronically filed returns, compared to fiscal year 2012. According to the fiscal year 2015 congressional justification, IRS realized savings of $11 million and 209 FTEs in fiscal year 2013 as a result of these changes, which exceeded projected savings by $2.4 million and 32 FTEs.

Space reduction. IRS reported it completed 89 projects in fiscal year 2013 to reduce the amount of physical space it uses. As a result, IRS will rent 557,779 fewer square feet, which will save $15.7 million in rent annually. Further, IRS approved 30 more such projects in fiscal year 2014, which IRS estimates will reduce its space needs by another 350,000 square feet, producing an additional savings of about $11.3 million annually.

In addition, to address budget cuts, IRS has taken steps that it anticipates will produce savings in fiscal years 2014 and 2015.

Telephone and walk-in services. In fiscal year 2014, IRS reduced or eliminated certain telephone and walk-in services. These actions are consistent with our finding in December 2012 that IRS needed to dramatically revise its strategy for providing telephone and correspondence services, and that incremental efficiency gains would not be enough to reverse service declines. Specifically, IRS limited telephone assistance to only basic tax law questions during the filing season and reassigned assistors to work account-related inquiries; launched the “Get Transcript” tool, which allows taxpayers to obtain a viewable and printable transcript on www.irs.gov, and redirected taxpayers to automated tools for additional guidance; redirected refund-related inquiries to automated services and did not answer refund inquiries until 21 days after a tax return was filed electronically or 6 weeks after a return was filed by paper (unless the automated service directed the taxpayer to contact IRS); limited access to the Practitioner Priority Services line to only those practitioners working tax account issues; limited live assistance and redirected requests for domestic employer identification numbers to IRS’s online tool; and eliminated free return preparation and reduced other services at IRS’s walk-in sites.

IT reductions. In part because of a lack of funding, IRS put a hold on aspects of two major IT projects: Information Reporting and Document Matching (IRDM). This program is intended to improve business taxpayer compliance by matching business information returns (e.g., Form 1099-K) with individual tax returns to detect potential income underreporting. According to IRS IT officials, during the hold IRS will determine the best case management tool to use to meet IRDM’s program requirements. IRS plans to leverage an off-the-shelf solution, which IRS believes will be more cost effective than building one.

Return Review Program (RRP). When fully deployed, RRP is expected to make use of leading-edge technology to detect, resolve, and prevent fraud. IRS expects to complete a plan to move beyond the hold on RRP in the summer of 2014. Officials said the plan will help inform IRS’s funding needs for RRP.

IRS Has No Long-Term Strategy to Address an Uncertain Budget Environment

IRS does not outline a framework for how it should operate in an uncertain budget environment in either its fiscal year 2009 through 2013 strategic plan or its fiscal year 2014 goals and objectives included in the fiscal year 2015 congressional justification for IRS. While IRS has taken steps in the short-term to address budget cuts (including sequestration)— such as exception-only hiring and reducing or eliminating some telephone and walk-in services—it does not have a strategy to operate in an uncertain budget environment over the long-term.

Further, we found that IRS absorbed the majority of cuts as a result of actions that were not part of a long-term strategy. According to officials from IRS’s Office of Corporate Budget, IRS has absorbed the majority of cuts through attrition and, as a result, the programs that experienced the most attrition were the programs that absorbed the most cuts. In fiscal years 2012 through 2013, IRS absorbed roughly $516 million through attrition, nearly $383 million from enforcement activities, according to data provided by IRS. Officials also noted IRS has taken large budget cuts over the last several years. As IRS continues to operate in an uncertain budget environment, it continues to examine and prioritize what it can cut and what it can postpone. According to the NTA, the budget cuts have caused IRS to operate in crisis mode—reacting to external changes and putting out fires. The NTA also stated that IRS has no overall, cohesive strategy to understand what kind of services it should be providing and when to eliminate a service.

In response to our questions about IRS’s lack of a long-term strategy, officials noted that one key problem has been the extensive turnover in senior leadership across the agency. Nineteen of 46 members—over 40 percent—of IRS’s Senior Executive Team were on-board on or after October 1, 2013, including the new IRS Commissioner, who took office in December 2013. However, IRS began an extensive review of its base budget in April 2014 in order to collect detailed spending and performance information for each of its distinct programs. Once IRS completes this review, management plans to determine the proper funding levels for each program and how to realign existing resources.

While this is an important start, it may not be sufficient over the long term. There are a number of indications that funding is unlikely to soon return to the growing and high budget levels IRS experienced in fiscal years 2010 and 2011. First, our work on the nation’s long-term fiscal outlook shows that growth in spending for federal health care and retirement programs will place increasing pressure on discretionary spending. Second, in May 2014, OMB generally required a 2 percent reduction in agencies’ fiscal year 2016 budget submission. Third, under the Budget Control Act of 2011 (BCA), sequestration of discretionary appropriations could occur in any fiscal year through 2021. In addition, as shown in figure 4, for the past several fiscal years IRS has been appropriated less than it requested, with a difference of 13 percent in fiscal year 2014. Looking back over a 10-year horizon provides further evidence that funding levels provided in fiscal years 2010 and 2011 were an exception and that the recent decline might be viewed more as a return to normal. All of these factors indicate that it is increasingly important for agencies to have long- term plans to address uncertain budget environments.

In addition, according to Executive Order No. 13576 and OMB guidance, agencies are to develop strategies for operating effectively and efficiently in an uncertain budget environment. We have previously reported on steps that agencies can take to do this. These include reexamining programs, related processes, and organizational structures to determine whether they are effectively or efficiently achieving their mission. They also include streamlining or consolidating management or operational processes and functions to make them more cost effective. We have also made recommendations to IRS on how it can more strategically manage operations in specific areas, such as developing a long-term strategy to improve its online services.

A long-term strategy that includes a fundamental reexamination of IRS’s operations, programs, and organizational structure could help it operate more effectively and efficiently in an environment of budget uncertainty. Although IRS has taken steps in the short term, they may not be sufficient to stem performance declines. While IRS was able to mitigate some of the effects of sequestration, it is unlikely that the steps taken are sustainable strategies in the long term. Moreover, the extent of turnover in senior leadership makes it even more important to have a long-term guiding strategy.

IRS Does Not Use Return on Investment Data to Evaluate the Performance of Revenue Initiatives or to Inform Enforcement Resource Allocation Decisions

IRS Calculates a Projected, but Not Actual, ROI for Most New Enforcement Initiatives

IRS calculates a projected return on investment (ROI)—the projected revenue divided by the projected cost—for most proposed new enforcement initiatives cited in the congressional justification. In the calculation, revenue represents the expected direct revenue effects of the initiatives, but does not reflect any indirect revenue effects that may result if the added enforcement activities increase voluntary compliance among taxpayers. Cost includes all enforcement-related resources used by IRS, but does not incorporate compliance costs imposed on taxpayers.

For fiscal year 2015, IRS proposed 13 enforcement initiatives (see table 2). IRS estimated a projected ROI for 8 of the initiatives. In addition, 11 initiatives are predicated on funding from a program integrity cap adjustment. IRS calculates ROI over a 3-year period (based on projections of associated costs and expected revenue) because it expects that staff working on the initiative will reach their full performance after 3 years.

IRS Does Not Calculate an Actual ROI Once Initiatives Are Implemented

As of May 2014, IRS has not determined the extent to which the resources actually devoted to enforcement initiatives differ from the 3- year projections of resources described in prior budget justifications. Nor has IRS computed actual rates of return on the resources that were actually used for specific initiatives. As a result, neither IRS nor others know whether the program initiatives it proposed, once implemented, were as productive as expected. We have reported that calculating actual ROI would be a significant step forward in determining how initiatives are performing and whether calculations for projected ROIs need to be adjusted. IRS, following a recommendation from the Treasury Inspector General for Tax Administration, is conducting a feasibility study to identify the necessary steps and challenges that exist to measure actual revenue for enforcement initiatives. IRS expects to complete the study in December 2014.

IRS officials noted that one reason they do not calculate actual ROI for enforcement initiatives is because it is difficult to determine which staff have actually worked on a particular initiative over a multi-year period. According to IRS officials, IRS creates exam plans each year based on division goals and priority areas, which can change on an annual basis. As such, staff may be initially hired to work on a specific initiative, but may work on another initiative the following year. According to IRS officials, different individuals may work on an initiative during the course of a year, rather than specific individuals being dedicated to the initiative 100 percent of the time. When staff initially hired to work on an initiative are transferred to another initiative, there can be significant differences between the scope of the proposed and implemented versions of the initiative. In our prior work, we noted that if IRS falls behind on its hiring plans, staff may not reach their full potential as quickly as anticipated, which ultimately could delay projected revenue gains.

In addition, officials from the IRS Corporate Budget Office cited difficulties in tracking ROI-related information on funded initiatives, because of difficulties in matching information between IRS systems for formulating and executing its budget. IRS has established funded program codes (previously known as internal order codes) as a mechanism to track specific initiatives—such as IRDM and merchant card/cost basis reporting—which could provide actual ROI, but IRS mainly uses these codes to track information that is of interest to congressional staff.

Comparing projected ROI to actual ROI is consistent with project management concepts, internal control standards, OMB guidance, and our prior work on performance management. In addition, budget decision makers in Congress have stated that a comparison of projected ROI to actual ROI initiatives would be useful information to have. Until IRS calculates actual ROI for its implemented enforcement initiatives, it is not accountable for the ROI it projected when requesting funding.

IRS Calculates Actual ROI for Its Broad Enforcement Programs, but Does Not Use It to Inform Resource Decisions

In June 2009, we recommended that IRS calculate actual ROI because it provides information about how programs and initiatives are performing and the possible need to adjust ROI methodologies to more effectively project results of future proposed initiatives. We have recognized that calculating actual ROI is challenging and existing data may not be complete.

Based on our prior recommendation, IRS began reporting actual ROI in the fiscal year 2014 congressional justification for the following three major enforcement programs:

Examination. This program conducts examinations of tax returns of individual taxpayers, businesses, and other types of organizations to verify that the tax reported is correct.

Collection. This program collects delinquent taxes and secures delinquent tax returns through the appropriate use of enforcement tools such as liens, levies, seizures of assets, installment agreements, offers in compromise, substitute for returns, and 26 U.S.C. § 6020(b), which allows the IRS to prepare returns if a taxpayer fails to file a return.

Automated Underreporter. This program matches taxpayer information returns against data reported on individual tax returns and verifies the information to identify any discrepancies.

According to IRS officials, IRS calculates the actual ROI for these programs because total enforcement revenue collected is allocated to these three categories. IRS reports the actual ROI in the congressional justification, based on our previous recommendation and congressional budget decision makers’ interest in this information. However, IRS does not use this actual ROI information for resource allocation decisions because the data do not reflect marginal ROI, nor do they include the indirect effects of IRS enforcement activities on voluntary compliance. Moreover, because of the time required to work enforcement cases to completion, the costs associated with assessing and collecting additional revenues may be spread over more than one fiscal year and are not necessarily aligned with revenue collections that may occur in subsequent years. These limitations are critical concerns, which is why we recommended in 2012 that IRS develop estimates of marginal direct revenue and marginal direct costs within each enforcement program. We further recommended that IRS explore the potential of estimating the marginal influence of enforcement activity on voluntary compliance. However, given that these data gaps could take considerable time to fill, we also demonstrated how IRS planners could in the meantime review actual (average) ROI across different enforcement programs and across different groups of cases within these programs to better inform resource allocation decisions. As we noted, the planners could consider this information in combination with their professional judgment relating to other relevant but currently unquantifiable factors. In fact, while limited in scope, we demonstrated how a hypothetical shift in resources could potentially increase direct revenue by $1 billion annually, without significant negative effects on voluntary compliance.

The development of data relating to marginal ROI would also enable IRS to improve its projections of ROI for enforcement initiatives, particularly those that expand coverage for specific taxpayer categories. IRS currently knows little about the extent to which marginal yields differ from average yields within specific return categories; consequently, it does not know the extent to which its ROI projections, which are based on average yields, may be overstated. By collecting the data needed to compute actual ROI for expanded coverage enforcement initiatives, IRS would be able to determine whether marginal returns are significantly lower than average returns; thereby, IRS would have better information for deciding whether the expanded coverage should be maintained, cut back, or expanded further in future years. Actual productivity information and better ROI projections can also help budget decision makers in determining funding levels for IRS.

Since Inception, IRS Has Spent $859 Million to Implement PPACA, but an Updated IT Cost Estimate Is Unavailable for Review

When enacted, PPACA gave IRS responsibility for implementing a number of provisions. From fiscal year 2010 through 2012 and again in 2014, IRS received funds for PPACA implementation activities from the Department of Health and Human Services Health Insurance Reform Implementation Fund (HIRIF), which is used to fund the federal administrative expenses to implement PPACA. To implement PPACA provisions in fiscal years 2013 and 2014, IRS requested $360.5 million and $439.6 million, respectively, but it did not receive this funding. As we previously reported, of the $12.5 billion IRS requested for fiscal year 2015, $451.7 million is to implement PPACA. Table 4 shows the amounts IRS obligated for PPACA implementation from fiscal years 2010 to 2014.

For fiscal year 2014, IRS identified seven initiatives related to PPACA implementation. Table 5 shows how much IRS plans to spend on these initiatives in fiscal year 2014 and the amount spent through the middle of fiscal year 2014. Of the total planned spending for fiscal year 2014— $400.6 million—IRS has obligated $87.1 million through March 31, 2014.

Table 6 shows how much IRS requested to implement PPACA initiatives in fiscal year 2015.

As of December 2012, IRS estimated the full life-cycle costs for PPACA to be $1.89 billion from fiscal years 2010 through 2026. According to IRS officials, an update to the December 2012 PPACA cost estimate was completed in September 2013. The updated cost estimate is still under review and it will not be released until January 2015. As a result, we cannot assess the progress made on implementing our prior recommendations.

In September 2013, we reported that IRS made progress in updating its initial October 2010 PPACA cost estimate, in accordance with best practices as identified in the GAO Cost Estimating and Assessment Guide. However, we found that IRS could take further steps to improve the estimate’s accuracy and credibility. At that time, IRS agreed with the majority of the actions we recommended. IRS officials reported that the September 2013 PPACA cost estimate does address some of the recommended actions. For example, IRS officials said they implemented our recommendation to document how cost drivers are selected for future sensitivity analyses. However, until the September 2013 cost estimate is available for our review, we cannot verify these changes.

IRS Implemented Three of Seven Prior Recommendations

Since September 2013, IRS at least partially implemented three recommendations made in our prior reviews of its budget justification documents. Two of the implemented recommendations resulted in more transparent reporting and greater accessibility to IT investments data. Table 7 summarizes the recommendations implemented by IRS.

Four budget-related recommendations to IRS remain open. As shown in table 8, IRS is planning to implement two of the open recommendations, but only partially agrees with the two remaining open recommendations. Appendix II identifies all of our products with open matters for Congress and recommendations to IRS regarding tax administration that could result in potential savings or increased revenues.

Conclusion

IRS is operating in an uncertain budget environment, and there are implications that significant funding increases are unlikely in the foreseeable future. While IRS has taken steps in recent years to reduce spending, those steps were generally reactionary. Now is the time to fundamentally reexamine its operations, programs, and organizational structure to determine how to most efficiently and effectively accomplish its mission. Creating such a roadmap will help ensure that IRS effectively provides taxpayers with services to make voluntary compliance easier and to enforce the tax laws, so that taxpayers fulfill their tax responsibilities. A roadmap will also help provide continuity in light of any future turnover among senior executives.

As IRS examines its operations, it will need multiple sources of data on which to base its assessment and to ultimately make resource allocation decisions. While not necessarily the only factor in making resource allocation decisions, actual ROI could provide insight on the productivity of a program and inform estimating techniques for new initiatives. In turn, better estimates of ROI and actual productivity information can help budget decision makers in determining funding levels for IRS. Comparing projected and actual ROIs can help hold managers and the IRS accountable for the funding received.

Recommendations for Executive Action

We recommend the Commissioner of Internal Revenue take the following three actions: As a result of turnover in IRS’s Senior Executive Team and in order to enhance budget planning and improve decision making and accountability, we recommend IRS develop a long-term strategy to address operations amidst an uncertain budget environment. As part of the strategy, IRS should take steps to improve its efficiency, including (1) reexamining programs, related processes, and organizational structures to determine whether they are effectively and efficiently achieving the IRS mission, and (2) streamlining or consolidating management or operational processes and functions to make them more cost- effective.

Because ROI provides insights on the productivity of a program and is one important factor in making resource allocation decisions, we recommend IRS calculate actual ROI for implemented initiatives, compare the actual ROI to projected ROI, and provide the comparison to budget decision makers for initiatives where IRS allocated resources; and use actual ROI calculations as part of resource allocation decisions.

Agency Comments and Our Evaluation

We provided a draft of this report to the Commissioner of Internal Revenue for comment. In written comments, reproduced in appendix III, IRS agreed with our recommendations. Regarding our recommendation to develop a long-term strategy to address operations amidst an uncertain budget environment, IRS noted that it is conducting a review of its budget base to ensure resources are aligned with IRS Strategic Goals, Objectives, and Priorities, and will adjust its fiscal year 2015 budget as a result of this review. Regarding our ROI recommendations, IRS agreed that ROI is one of several factors relevant to making resource allocation decisions. However, IRS noted that determining the impact of an initiative will always rely on estimates, as the results of an initiative are the difference between actual results and what would have occurred in the absence of the initiative, which cannot be measured. We agree that projected benefits are based on estimates, but it is possible to develop an estimate for what would have occurred in the absence of the initiative. Moreover, this report emphasizes comparisons between projected and actual ROI, not comparing actual results with what would have occurred in the absence of an initiative. Comparing projected and actual ROI is important to assist budget decision makers in determining funding levels for IRS and to hold managers and the IRS accountable for the funding received. IRS also provided technical comments on our draft report, which we incorporated as appropriate.

We plan to send copies of this report to the Chairman and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We are also sending copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, and the Chairman of the IRS Oversight Board. The report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff has any questions about this report, please contact us at (202) 512-9110 or mctiguej@gao.gov. Contact points for our offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

We were asked to review the President’s fiscal year 2015 budget request for the Internal Revenue Service (IRS). The objectives of this report were to (1) assess IRS’s strategy to address the budget cuts, including sequestration; (2) assess any new use of return on investment (ROI) analysis; (3) summarize requested funding and actual and planned spending for the Patient Protection and Affordable Care Act (PPACA) and assess the updated PPACA information technology cost estimate; and (4) describe IRS’s progress in implementing open GAO budget- related recommendations and list any GAO open matters for Congress and recommendations for executive action that could result in potential savings or increased revenue for IRS.

To assess IRS’s strategy to address the budget cuts, including sequestration, we summarized IRS’s budget, staffing, performance, and workload trends for fiscal years 2009 through 2015. We selected fiscal year 2009 as a starting point because fiscal year 2009 was the year prior to IRS’s highest appropriation in recent years. To summarize these trends, we analyzed congressional justifications for IRS for fiscal years 2009 through 2015 and performance data for key IRS operations. When we describe full-time equivalent (FTE) trends, the actual number of FTEs represents total number of hours worked (or to be worked) divided by the number of compensable hours applicable to each fiscal year, according to definition provided by IRS. Enacted FTEs represents the number of FTEs provided for the enacted budget. Requested FTEs represents the number of FTEs requested in the President’s Budget for IRS.

We also analyzed FTE and workload trends on IRS identified priority programs, which include new statutory mandates. We reviewed reports by the IRS Oversight Board, Treasury Inspector General for Taxpayer Administration (TIGTA), and the National Taxpayer Advocate (NTA), which provided some possible reasons for performance declines. In addition, we analyzed proposed program initiatives in the fiscal year 2015 congressional justification and determined which ones were predicated on a program integrity cap adjustment, which Congress passes to allow additional funding above discretionary spending limits. We also analyzed steps IRS has taken to address budget cuts, including sequestration. To analyze these steps, we reviewed the fiscal year 2015 congressional justification, including information on savings initiatives realized or proposed from fiscal years 2009 through 2015 and prior GAO work on sequestration. We also interviewed IRS officials in IRS offices of Corporate Budget and Information Technology and the NTA. We compared IRS efforts to address uncertain budgets to Executive Order 13576 “Delivering an Efficient, Effective, and Accountable Government” and Office of Management and Budget (OMB) guidance. In addition, we compared IRS efforts to leading practices in government performance and efficiency.

To assess any new use of ROI analysis, we reviewed the fiscal year 2015 congressional justification to identify IRS’s projected and actual ROI; obtained data from IRS to determine the new initiatives by projected revenue, cost, and type; and summarized projected ROI by type for new enforcement initiatives and actual ROI for IRS’s three enforcement programs—Examination, Collection, and Automated Underreporter. As part of our analysis of proposed program initiatives, we also identified any new enforcement initiative predicated on a program integrity cap adjustment. We reviewed OMB and IRS guidance on new program initiatives and interviewed IRS Corporate Budget officials to determine how IRS calculates ROI for proposed initiatives and the extent to which it compares estimated ROI to actual ROI for funded new initiatives. We reviewed prior GAO and TIGTA reports to identify criteria for measuring actual revenue of new program initiatives and for use in resource allocation decisions. We also interviewed IRS Research, Analysis, and Statistics officials to discuss the IRS feasibility study on ROI calculations and challenges in calculating actual ROI for new enforcement initiatives, as well as current enforcement programs.

To provide funding and spending information on PPACA, we summarized data by appropriation account since program inception (fiscal year 2010) and analyzed new information on actual and planned spending for fiscal year 2014, based on congressional budget justifications for IRS and on spending plans. We could not assess the most recent update of the PPACA cost estimate—September 2013—because it is still under review. However, to determine IRS’s progress in updating its cost estimate (consistent with our recommendation in 2013 to follow best practices identified in the GAO Cost Estimating and Assessment Guide) we interviewed and obtained some documentation from IRS officials.

To describe IRS’s progress in implementing our prior budget-related recommendations, we obtained information from various IRS officials and reviewed relevant documentation, including the fiscal year 2015 congressional budget justification and the IRS Joint Audit Management Enterprise System reports, which track IRS actions taken to implement GAO recommendations. We then determined which recommendations were implemented. We also searched the GAO Engagement Reporting System to identify prior GAO open matters for Congress and recommendations for executive action. We then identified whether the recommendation or matter could result in a potential savings, increased revenue, or indirect financial benefits for IRS.

We interviewed IRS officials and determined that the data presented in this report were sufficiently reliable for our purposes. We conducted our work in Washington, D.C., where key IRS officials involved with the budget are located.

We conducted this performance audit from November 2013 to June 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: GAO Products with Open Matters for Congress and Recommendations to the Internal Revenue Service (IRS)

Appendix II: GAO Products with Open Matters for Congress and Recommendations to the Internal Revenue Service (IRS)

In the 37 GAO products listed below, as of March 13, 2014, there are 10 open matters for Congress and 72 open recommendations to IRS. Of these matters and recommendations, 20 increase revenue, 15 increase savings, 10 increase both savings and revenue, and 37 have indirect financial benefits.

Appendix III: Comments from the Internal Revenue Service

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Libby Mixon, Assistant Director, Jehan Chase, Pawnee A. Davis, Mary Evans, Charles Fox, Suzanne Heimbach, Carol Henn, Felicia Lopez, Paul Middleton, Ed Nannenhorn, Sabine Paul, Mark Ryan, Erinn L. Sauer, Cynthia Saunders, Tamara Stenzel, and Jim Wozny made major contributions to this report.