IRS 2016 Budget: IRS Is Scaling Back Activities and Using Budget Flexibilities to Absorb Funding Cuts
Released: 2015-07-24T00:00:00

Letter

Background

IRS Budget Formulation and Execution Structures

IRS formulates its budget at three levels: (1) appropriation account, (2) budget activity, and (3) program activity. IRS requests funding by appropriation accounts, which align broadly with its strategic goals, which are to (1) deliver high quality and timely service to reduce taxpayer burden and encourage voluntary compliance; and (2) effectively enforce the law to ensure compliance with tax responsibilities and combat fraud. IRS’s CJ presents funding and FTE information at the appropriation account and budget activity levels. In addition, it provides descriptions of program activities within each budget activity. IRS has four appropriation accounts (fiscal year 2015 appropriation listed in parentheses):

Enforcement ($4.86 billion): Funds activities such as determining and collecting owed taxes, providing legal and litigation support, and conducting criminal investigations.

Operations Support ($3.64 billion): Funds activities including rent and facilities expenses, IRS-wide administration activities, and IT maintenance and security.

Taxpayer Services ($2.16 billion): Funds taxpayer service activities and programs, including pre-filing assistance and education, filing and account services, and taxpayer advocacy services.

Business Systems Modernization ($290 million): Funds the planning and capital asset acquisition of IT to modernize 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 20 program activities, such as Tax Reporting Compliance – Field Exam; Earned Income Tax Credit Management and Administration; and Whistleblower Office. In addition to program activities, the lower levels of the budget formulation and budget execution structures include business units and other areas of interest, which are not discrete categories. For example, Wage and Investment is one division within IRS and can be referred to as a business unit, while identity theft would be considered an area of interest that crosses divisions within IRS.

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. IRS executes its budget across 18 fund centers, which manage and distribute funds.

Budget Flexibility

IRS has some flexibility in how it allocates its resources. IRS may shift resources among program activities (activities within a budget activity). For example, IRS could shift resources among any of the 20 program activities within the Exam and Collection budget activity without congressional approval or notification. Additionally, IRS may reprogram funds among budget activities within certain limits.

While IRS cannot transfer resources from one appropriation account to another without specific statutory authority to do so, the agency still has some flexibility because fund centers may receive funds from more than one appropriation account. Over half of IRS fund centers or business units receive funding and obligate funds from multiple appropriation accounts. IRS management allocates funds to each business unit (subject to transfer and reprogramming limitations) and has more flexibility when there are multiple accounts from which it may fund a business unit.

IRS also has flexibility in how it allocates user fees because it determines the amount of funds transferred to each appropriation account. In fiscal year 2014, IRS transferred $416 million in user fee funds to its appropriations accounts to be spent. IRS collects user fees for various activities such as assisting taxpayers in complying with their tax liabilities, clarifying the application of the tax code to particular circumstances, and ensuring the quality of paid preparers of tax returns.

Information Technology

IT comprises a significant portion of IRS’s budget and plays a critical role in enabling IRS to carry out its mission and responsibilities. The fiscal year 2015 appropriation includes about $2.5 billion for IT investments; this represents over 20 percent of the total IRS budget. IRS relies on information systems to process tax returns, account for tax revenues collected, send bills for taxes owed, issue refunds, assist in the selection of tax returns for audit, and provide telecommunications services for all business activities, including the taxpayer toll-free access to tax information, among other things.

IT investments are funded through both the Operations Support and the Business Systems Modernization appropriation accounts as well as through user fees. The President’s fiscal year 2016 budget request includes $3.24 billion for IRS IT investments. Of that amount, $2.26 billion is for 20 major IT investments.to additional reporting requirements.

Funding Declined for Most IRS Business Units and Tradeoffs to Manage Reductions May Affect Some Programs’ Effectiveness and Increase Risk

Fifteen of Eighteen Business Units Decreased Spending

IRS’s total appropriations declined from a high of $12.1 billion in fiscal year 2010 to $11.3 billion in fiscal year 2014, a reduction of about 7 percent. Reflecting IRS’s overall budget decline, spending fell in 15 of the 18 fund centers or business units from fiscal year 2010 to fiscal year 2014, and spending in 9 fund centers declined 10 percent or more. For example, SB/SE, which was the largest business unit in fiscal year 2010, experienced a 14 percent decrease in obligations—from $2.6 billion to $2.3 billion—from fiscal year 2010 to fiscal year 2014. Over half of IRS fund centers or business units receive appropriations from multiple accounts. As shown in figure 1, of the 18 fund centers, 11 obligate funds from two or more of IRS’s four appropriation accounts.fund centers obligate funds from only one account and 5 of those 7 serve in an operational support capacity, such as Agency Wide Shared Services, HCO, and Chief Financial Officer. Of the 9 fund centers that experienced a decline in obligations of at least 10 percent, 5 receive funding from only one appropriation account. Business units that receive funds from more than one appropriation account may have increased flexibility because IRS can balance reductions in one account with resources from another account, provided that any shifts in funding do not violate appropriation, transfer or reprogramming restrictions.

Selected Business Units Scaled Back Activities, Potentially Reducing Program Effectiveness or Increasing Risk to IRS and the Federal Government

Each business unit we examined—HCO, Office of Chief Counsel, and SB/SE—took actions to absorb budget reductions. One common element among each of the business units examined is that they spend 80 percent or more of their funds on labor. When IRS receives its budget, the Corporate Budget Office coordinates with business units to ensure that each business unit has sufficient funding to support FTEs already onboard. The review of FTEs aligns anticipated salary and benefit costs to available appropriated funding for each business unit. As seen in Table 1, from fiscal year 2010 to fiscal year 2014, FTEs declined through attrition in each of the business units examined.

Because labor comprises the majority of these business units’ expenses, unit managers are limited in how they implement budget cuts. According to business unit officials, budget reductions were often implemented by decreasing the amount or type of activity performed. One key factor that influenced business units’ decisions about how to prioritize activities was whether the activity was statutorily mandated. According to IRS officials, statutorily mandated activities—such as tax litigation in the Office of Chief Counsel—remained a priority.

Examples of Programs and Services Reduced or Eliminated

Non-filer investigations. SB/SE significantly reduced the individual and business non-filer cases it pursues. IRS detects taxpayers that failed to file—non-filers—by matching third party information with tax returns for individuals, and relying on open filing requirements and third party information for businesses. In tax year 2010, IRS started 3.5 million individual non-filer cases and 4.3 million business non-filer cases. In tax year 2014 non-filer cases dropped to 2.0 million for individuals and 1.8 million for businesses, a reduction of 43 percent and 58 percent, respectively. According to SB/SE officials, detecting and pursuing non-filers is not mandatory. By not pursing non-filers, however, IRS misses the opportunity to bring a noncompliant taxpayer into the tax system, and the government could forego potential revenue from taxes, penalties and interest payments.

Private letter rulings. The Office of Chief Counsel limited the number and scope of private letter rulings—a written statement issued by IRS at the request of a taxpayer that interprets and applies tax laws to the taxpayer’s represented set of facts. Private letter rulings decreased by 30 percent—from 935 to 651—from fiscal year 2010 through 2014. The drop in private letter rulings means that fewer taxpayers receive a ruling prior to filing, causing uncertainty for them and the tax community. According to Counsel officials, one benefit of the private letter rulings is that they can alert IRS attorneys to nascent tax issues. Private letter rulings are not mandatory and IRS charges a user fee for the service to offset the cost of the service. However, since there are a limited number of FTEs, IRS decided to scale back work in the area in order to shift those FTEs to other activities, such as issuing regulations and public guidance.

Bankruptcy program. According to Counsel officials, a bankruptcy program supported by approximately 30 FTEs was eliminated. IRS attorneys supporting the program were appointed as Special Assistant United States Attorneys to represent IRS in bankruptcy court instead of Department of Justice attorneys. The program was identified as low priority because it was not required by statute.

Examples of Deferred Programs or Acquisitions

Software acquisitions. According to officials in the Office of the Chief Counsel, the limited budget for litigation-related information technology has prevented Counsel from acquiring modern, industry standard electronic discovery software. Such software is used to capture and preserve documents for the discovery phase of tax and other litigation. According to Counsel officials, the outcome of tax litigation cases has been impacted because IRS does not have the software. For example, parties to a lawsuit frequently request emails and other computer files related to a particular topic or keywords, and the software thoroughly and efficiently identifies the files, minimizing the need for time-intensive manual review of the files. IRS was recently sanctioned in court and ordered to reimburse a plaintiff $12,500 for the cost of depositions because it did not have the technical capability to produce appropriate documents for discovery. This issue has been raised with IRS management through the Enterprise Risk Management and budget processes. Counsel officials stated that IRS has funded other high-priority IT systems, but that there has not been sufficient funding to acquire e-discovery software or support an effective e-discovery function. IRS estimates the cost of the software is $10 million.

Background reinvestigations. IRS has postponed reinvestigations for moderate risk employees since fiscal year 2013. Almost half of IRS’s FTEs, approximately 38,000 employees, are identified as moderate risk, and 24,000 reinvestigations have been postponed. In November 2011, the Office of Personnel Management amended its regulations to direct that federal employees occupying positions of public trust (those designated as high or moderate risk) undergo a background reinvestigation every 5 years. Periodic reinvestigations allow agencies to determine if employees are still suitable for U.S. government employment, or still eligible to hold a sensitive position. IRS completed reinvestigations in fiscal year 2012 at a cost of approximately $3.9 million. For fiscal year 2016, the President’s Budget requests $3.5 million and 11 FTEs for IRS to implement federal investigative standards, which includes reinvestigations of employees.

IRS Is Using Its Budgeting Flexibility and Taking Steps to Improve Agency-Wide Coordination of Budget Decisions

IRS Has Flexibility in Spending User Fee Revenue

In fiscal year 2015, IRS plans to allocate less user fee revenue to the taxpayer services account than in previous years ($49 million, compared to around $180 million in fiscal years 2012, 2013, and 2014). IRS plans to allocate a larger amount to the operations support account ($411 million, compared to $132 million, $183 million, and $218 million in fiscal years 2012, 2013, and 2014, respectively). According to IRS officials, management decided to allocate more user fee funds to operations support in fiscal year 2015, in part because that year’s appropriation for operations support was $161 million (4.2 percent) less than fiscal year 2014, while taxpayer services was not reduced during that time frame. According to IRS officials, user fee revenue allocated to operations support will be used to meet requirements to implement PPACA and fund investment in the design, development, and deployment of mainframe and server investments which can help IRS better respond to taxpayers. IRS officials said that user fees allocated to operations support reduce system downtime, which positively affects IRS’s ability to respond to taxpayers, process returns, collect revenue and issue refunds.

Although IRS services and operations are primarily funded through annual appropriations, IRS has the flexibility to supplement its appropriations with other resources, such as user fees. IRS deposits user fees that it is authorized to retain into its Miscellaneous Retained Fees Fund before transferring funds to an appropriation account to be spent. In fiscal year 2014, $677 million was available in the account. IRS transferred $416 million of that money to its appropriation accounts which accounted for 3.4 percent of IRS’s total available resources. Remaining funds are carried over to the next fiscal year. Table 2 shows user fee funds transferred to IRS’s appropriation accounts during recent fiscal years. For fiscal year 2015, IRS plans to transfer a total of $481 million.

IRS Planning Efforts Informed the Management of $346 Million in Budget Reductions

IRS managed reductions by strictly limiting hiring, overtime, and overhead costs. The reductions were informed by a December 2014 planning exercise. In this exercise, IRS prepared for how it would absorb a hypothetical 5 percent budget reduction. Business unit managers identified funding requirements for current activities and categorized programs as high, medium, or low priority, including how the proposed reduction would affect program spending and FTE counts. Business unit officials identified and documented legally or contractually required activities and also identified potential risks and the potential performance impact of cutting or not funding each activity. Ultimately, IRS’s budget decreased $346 million from fiscal year 2014 to fiscal year 2015, a 3.1 percent decline. IRS considered furloughing employees for up to 2 days in fiscal year 2015 to help absorb the budget cuts; it since determined that furlough days will not be necessary because it is able to absorb the reductions in other areas.

Following the planning exercise, in January 2015, IRS identified the following actions to absorb this budget reduction.

External hiring freeze: IRS plans to replace few employees who leave the agency. In an agency with over 80,000 FTEs, all requests for external hiring in fiscal year 2015 must be approved by a direct report to the Commissioner. Specifically, requests for new hires are reviewed by the Deputy Commissioner for Operations Support, Deputy Commissioner for Services and Enforcement, and in certain cases, the Chief of Staff.

Internal hiring restrictions: New policies require that resources be available to cover both current year and annualized future costs for any internal hiring, permanent promotions, or reassignments. These policies ensure that employee transfers are consistent with the workflow needs of the agency.

Overtime restrictions: Overtime was eliminated except for a small amount to support the tax filing season or for mission critical needs. IRS uses overtime frequently during the tax filing season to process tax returns and provide taxpayers service, such as by telephone or at assistance centers. All overtime requests were to be approved by the Deputy Commissioners or the Chief of Staff to the Commissioner. According to IRS officials, limitations on overtime are estimated to save approximately $75 million.

Overhead cost reductions: Spending on travel and training, contracts, and supplies and printing is restricted and business unit heads are required to review the priorities for contract spending and identify lower cost alternatives.

IRS Is Working to Increase Agency-Wide Coordination in Budget Decisions in Response to Constrained Budget Environment

Recently, IRS launched two efforts to increase management coordination in budget formulation and execution decisions. In one effort, IRS established the Program and Budget Advisory Committee to help it improve its process for determining agency-wide priorities and for allocating resources to fund those priorities. According to IRS officials, this committee was formed in October 2014. It is intended to prevent resources from being allocated on a first come, first served basis or on some other arbitrary method. Members of the committee include executives from Strategy and Finance, Budget Execution, Systems and Analysis, and Corporate Budget; the Commissioner and Deputy Commissioners have decision-making authority. According to IRS, the committee will be responsible for overseeing and reviewing IRS’s budget execution and making recommendations on all matters relating to its financial operations. These include making recommendations for allocating funds, prioritizing mission critical needs, and assessing and reporting risk with regard to expending resources. IRS expects the outcomes to include a detailed decision-making process for prioritizing IRS-wide requirements that are aligned with its strategy and resource needs, open communication and transparency, and identification of risk and requirements in excess of available funds.

In another effort, responding in part to our June 2014 recommendation, IRS established the Planning, Programming, and Audit Coordination (PPAC) office in 2014 to improve coordination of (1) current and completed audits of IRS activities and (2) resource decision making and strategic planning. According to IRS, PPAC is to facilitate coordination among business units and operating divisions to improve resource allocation and planning as part of the budget formulation process. PPAC is to drive long-term planning for resource allocation to be seen first in the fiscal year 2017 budget. As envisioned, the new strategic approach is to include consideration of short-term trade-offs with long-term investments along with post-evaluation of investments.

IRS Reported on Major IT Investments in Its Fiscal Year 2016 Congressional Justification, but Some Information Was Inaccurate or Unclear

IRS Provided Inaccurate Data to the Congress

In its fiscal year 2016 CJ, IRS provided detailed information about its major IT investments, as it did in the 2014 and 2015 CJs; however, the information provided on actual obligations to date was inaccurate, due to potential deficiencies in some internal controls over the preparation of the CJ. IT is a significant portion—about 23 percent—of the total IRS budget request for fiscal year 2016. The request includes approximately $2.26 billion to fund 20 major IT investments and approximately $976 million for other IT investments. In the fiscal year 2016 CJ, IRS defines “actual obligations to date” as the actual obligations through fiscal year 2014 specific to each asset. However, despite this definition, the numbers reported for most investments only include obligations through fiscal year 2013. Because the CJ reports inaccurate information about amounts obligated to date for most of the 20 listed major IT investments, Congress does not have accurate, reliable, and current data to inform its budget decisions or aid in its oversight.

IRS increased the amount of information it reported on major IT investments in recent years’ CJs, and the fiscal year 2015 and 2016 CJs included information under the label “actual obligations to date” for each investment. Beginning with the fiscal year 2014 CJ, IRS reported detailed and precise quantitative and qualitative information on the cost and duration of its major IT investments. Information reported included life- cycle costs, projected useful life of the current asset, and anticipated benefits for each investment. In the fiscal year 2015 CJ, IRS added information on actual obligations to date for each of the major IT investments listed in the CJ. IRS provided this additional information in response to a recommendation we made in September 2013 for all major IT investments.

IRS reported inaccurate information on actual obligations to date for many of the major IT investments in the fiscal year 2016 CJ. The CJ states that these amounts represent obligations through fiscal year 2014. However, for all of the major IT investments listed in the CJ, with the exception of one newly added major investment, the amounts reported for actual obligations to date through fiscal year 2014 were the same as the amounts reported in the previous year’s CJ as actual obligations through fiscal year 2013. Data obtained separately from IRS show that amounts were obligated for all of these investments in fiscal year 2014, which indicates that the data were not updated in the CJ.

Officials in IRS’s Corporate Budget office stated that the data may not have been updated since they used last year’s information as a starting point in preparing the fiscal year 2016 CJ. According to the officials, staff in the Information Technology office prepare this section of the CJ and send it to Corporate Budget for inclusion in the final submission. Corporate Budget officials relied on data provided by the Information Technology staff without using any internal control procedure, such as checking the data against a reliable source, to confirm that these data were correct before including them in the CJ.

Standards for Internal Control in the Federal Government calls for agencies to ensure that ongoing monitoring occurs during the course of normal operations. Monitoring should be performed continually and be ingrained in the agency’s operations; it includes regular management and supervisory activities, comparisons, reconciliations, and other actions people take in performing their duties. Without such controls, IRS risks continued errors in the information on IT investments reported in its CJ. Such errors could negatively affect Congress’ ability to obtain accurate information on major IT investments needed to inform future budget decisions and oversight.

Some IT Investment Information Was Unclear Because IRS Did Not Use Standard Definitions

IRS reported information on “life-cycle cost” and “projected useful life of the current asset” for each major IT investment in the fiscal year 2016 CJ, but did not use standard definitions for these terms or define or explain the terms in such a way that they could be understood and used. Agencies are required to use standard terms established by the Comptroller General, in consultation with OMB, in providing fiscal, budget, and program information to Congress. The Comptroller General has established the following definition of life-cycle cost: “The overall estimated cost, both government and contractor, for a particular program alternative over the time period corresponding to the life of the program, including direct and indirect initial costs plus any periodic or continuing costs of operation and maintenance.” OMB’s Capital Programming Guide applies this definition to capital assets: “The cost of a capital asset is its full life-cycle cost, including all direct and indirect costs for planning, procurement (purchase price and all other costs incurred to bring it to a form and location suitable for its intended use), operations and maintenance (including service contracts), and disposal.”

IRS did not report data that are consistent with the required definition of “life-cycle cost” or offer an alternative definition. IRS Information Technology officials told us that the reported amounts represent estimates of full life-cycle costs for some major IT investments. For other investments, these amounts represent estimated costs for the current fiscal year and 2 future fiscal years. According to IRS officials responsible for preparing this portion of the CJ, they did not consider how long the investment was expected to last when deciding which estimates to report. Instead, they reported full life-cycle cost estimates when such estimates were available. When such estimates were not available, the officials reported 3-year estimates. However, the CJ identifies all investments’ reported life-cycle costs as representing full life-cycle costs.

In addition, IRS did not explain the meaning of the term “projected useful life of the current asset” in the CJ. In the Financial Services and General Government Appropriations Act, 2015, Congress directed IRS to include in its fiscal year 2016 CJ a summary of cost and schedule performance information for its major IT systems. In order for this performance information to be useful to Congress, the metrics reported in the CJ need to have the basic attributes of successful performance measures. As we previously reported, one of these attributes is clarity: a measure of performance has clarity when it is clearly stated and the name and definition are consistent with the methodology used for calculating it. IRS officials told us the dates reported under “projected useful life of the current asset” are not based on a projection about the date at which the current assets will no longer be useful, but are instead arbitrary dates several years in the future and do not represent projections of the useful According to IRS officials, the years reported for life of IT investments.most investments represent an arbitrary number of years, such as 3 or 5, after the current year. In some cases, the reported year may represent a projection of the useful life of the investment. However, according to an official in IRS’s Information Technology office, different people are responsible for reporting on different investments, and they may report information according to different understandings of the meaning of the term “projected useful life of the current asset.” The years reported in the CJ under “projected useful life of the current asset” for the 20 listed major IT investments are the following: 2017 (1 investment), 2018 (2 investments), 2019 (10 investments), 2020 (5 investments), 2021 (1 investment), and 2034 (1 investment).

As a result of this arbitrary process for reporting projected useful life, some of the information reported in the CJ is inconsistent with IRS’s plans for its major IT investments. For example, according to IRS Information Technology officials, they plan to continue using the Return Review Program after the Electronic Fraud Detection System is no longer in use. However, the fiscal year 2016 CJ reports a “projected useful life of the current asset” of 2020 for the Return Review Program and a later date, 2021, for the Electronic Fraud Detection System. This sequence of dates is inconsistent with the plan to stop using the Electronic Fraud Detection System while continuing to use the Return Review Program. For another major IT investment, the Affordable Care Act Administration investment, IRS’s Estimation Program Office has estimated costs for the investment through fiscal year 2026. This estimate indicates that IRS plans to use the Affordable Care Act Administration investment through fiscal year 2026. However, the CJ reports that the “projected useful life of the current asset” for the Affordable Care Act Administration investment is 2018.

Without clear and consistent definitions of these terms, the information IRS is reporting is of limited usefulness. As a result, Congress and other stakeholders do not have reliable information to make budget decisions about IT investments.

IRS Is Taking Steps to Implement GAO Recommendations, Including Those Related to Greater Use of Return on Investment Data and Improvements in the PPACA Cost Estimate

As of February 2015, we have 88 open recommendations and 8 matters for congressional consideration that could have financial implications if implemented. Since we last reviewed open recommendations to IRS and matters for congressional consideration during the fiscal year 2015 budget review, 19 recommendations to IRS were closed as implemented. For more information on open recommendations, see appendixes IV and V.

Additionally, we have conducted work related to 17 of the 35 legislative tax proposals included in the fiscal year 2016 CJ for IRS. For information about legislative proposals related to our open recommendations, see appendix VI.

Calculating and Using Return on Investment Data to Inform Resource Allocation Decisions Is a Long-Term Effort for IRS

In June 2014, we recommended that IRS use actual return on investment (ROI) calculations as part of resource allocation decisions. IRS has made progress in response to this recommendation. Specifically, IRS’s Research, Analysis, and Statistics Division has begun to estimate marginal direct revenue and marginal cost—the two key elements used to calculate return on investment data—attributable to specific compliance projects within its correspondence exam program. It plans to incorporate these estimates for use by SB/SE and Wage and Investment business unit managers for exam selection into the Exam Planning Scenario Tool, which is being developed by the Office of Compliance Analytics. That tool is intended ultimately to enable exam planners and business unit management to explore a wide range of potential exam plan scenarios and to compare the alternative effects on various enforcement objectives, including revenues collected and reduced taxpayer burden. Considerable work remains to be done on the multiple components of this long-term effort.

We also recommended that IRS calculate actual ROI for implemented initiatives. 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. Given that IRS is unable to attribute revenues to specific employees hired under an initiative, officials believe that any feasible estimate would need to be based on numerous assumptions and, therefore would be too uncertain to be useful. For this reason, IRS does not consider this additional analysis an effective use of its scarce research resources. However, we believe that IRS should be able to provide some information to Congress, such as whether funds that were requested for initiatives were used in the manner that IRS originally proposed.

IRS agreed that having this information would be useful.

See GAO-14-605.

Updated PPACA Cost Estimate Showed Improvement and Met or Substantially Met Criteria in Three of Four Overall Categories, but Is Still Not Considered Reliable

IRS’s PPACA cost estimate identifies the costs of planning, developing and implementing the IT systems needed to support its role in implementing PPACA. In February 2015, IRS released version 3 of the PPACA cost estimate as part of its ongoing practice to refine its cost estimate and address our prior recommendation. The cost estimate totals $2.72 billion (adjusted for inflation) from mid-fiscal year 2014 through fiscal year 2026; when prior years are included, the estimate increases to $3.43 billion from fiscal years 2010 through 2026 (adjusted for inflation). This updated cost estimate is a significant increase from the previous total of $1.89 billion (not adjusted for inflation) from fiscal years 2010 through 2026. According to IRS officials, this increase is due to a change in the scope of PPACA implementation activities which resulted in additional releases. For example, the new releases respond to regulatory changes in the requirements for the Small Business Health Options Program, add in the cost of sending preliminary notices to employers not offering employee coverage, and take into account the implementation of the excise tax on high-cost health plans that will begin in 2018. However, IRS has not finalized the scope of work for Release 7.1 and beyond, which raises questions about IRS’s ability to estimate costs for these releases.

According to the GAO Cost Guide, a reliable cost estimate must be comprehensive, well documented, accurate, and credible. In September 2013, we reported that version 1 of IRS’s cost estimate for PPACA did not fully meet best practices for a reliable cost estimate and recommended actions IRS should take to improve its cost estimate.estimate–version 3—reflects best practices to a greater extent, as shown in table 3. The cost estimate met or substantially met the criteria in three of four overall categories; however, a cost estimate must meet or substantially meet the criteria in all four overall categories to be considered reliable. From our assessment of version 1 of the cost estimate, of 20 sub-scores, 12 increased, 3 decreased, and 5 were constant. See appendix VII for a table of the sub-scores. Notably, IRS has improved documentation of how cost drivers for its sensitivity analysis The updated cost were selected with the score improving from partially meets to meets. As outlined below, there are several areas related to our open recommendation where IRS could continue to improve the cost estimate to better meet best practices outlined in the GAO Cost Guide.

Earned value management: We previously recommended that IRS use earned value management—a process for capturing actual costs and comparing them to estimated costs—to capture actual costs and use them as a basis for future updates. According to IRS officials, earned value management is not being used to track costs. Because of this, actual costs are not regularly being used to update the estimate and to determine where and why variances are occurring when there is still time to mitigate their effect on the program’s cost and/or schedule in a manner that is consistent with best practices. This issue affects multiple elements of the accuracy of the cost estimate assessment.

Variance from prior estimate: The estimate includes a general discussion of cost and schedule variance and gives an overview of how staffing and cost estimates have changed from the previous cost estimate; however, it does not offer a detailed discussion of the reasons why. A proper risk and uncertainty analysis is necessary to correctly assess the variability in the cost estimate due to program risks. In this area, the cost estimate improved from “minimally meets” to “partially meets.”

Risk and uncertainty analysis: IRS conducted a risk and uncertainty analysis but did not provide evidence that showed all of the steps they took to conduct the risk analysis, so we cannot verify that they followed best practices. Our assessment scored this element as “partially meets”—which is the same as our assessment of the earlier version of the cost estimate.

Validating the estimate: IRS did not obtain a second cost estimate and there is no program office estimate to use for comparison. 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. Our assessment scored this element as “minimally meets”—which is the same as our assessment of the earlier version of the cost estimate.

Conclusions

Over the last 5 years, IRS took steps to manage budget reductions; however, many were short-term actions, such as strictly limiting hiring and curtailing overtime. Some of these actions could result in future disruptions in taxpayer services and diminished administration of our tax system. IRS has some flexibility in how it allocates resources—including user fee revenue—within and across business units to achieve its mission and goals. IRS reprioritized many activities since fiscal year 2010 to address budget reductions. Activities and services that were scaled back remain important and may have benefits, including a positive return on investment or enhanced compliance with the tax system. IRS tradeoffs could lead to negative outcomes such as reduced program effectiveness and increased risk to IRS and the federal government. This highlights the importance of Congress and IRS working together to reexamine IRS’s mission and priorities. To improve transparency and inform decision- making, accurate information on IT investments in the CJ is imperative.

Recommendations for Executive Action

To enhance the budget process and to improve transparency, we recommend the Commissioner of Internal Revenue take the following actions: Implement internal controls to ensure the accuracy of information on major information technology investments reported in the annual congressional justification, such as obligations data.

To the extent possible, report information about major information technology investments in the congressional justification in accordance with the standard terms published by the Comptroller General in the Budget Glossary (GAO-05-734SP).

When using key terms that are not defined in the Budget Glossary or in OMB guidance, or when using a modification of these terms, provide definitions of key terms used to report information about major information technology investments in the congressional justification.

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 VIII, IRS agreed with our recommendations. IRS plans to conduct a comprehensive review of its capital planning and investment control activities, with particular emphasis on investment controls. As part of this review, IRS plans to identify any gaps in the use of standard terms, make recommendations for changes to standard terms, and define terms not included in the Budget Glossary. We agree that identifying gaps and implementing changes to enhance the budget will improve data quality. IRS also provided technical comments on our draft report, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Chairman and Ranking Members of Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We will also send copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, 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 key contributions to this report are listed in Appendix IX.

Appendix I: IRS Funding and FTE Data from Fiscal Year 2009 through Fiscal Year 2016

Appendix II: Non-interactive Version of Figure 1 - Fiscal Year 2014 Obligations by Fund Center and Percentage Change from Fiscal Year 2010

This table does not include obligations less than $1 million. In fiscal year 2014, 4 fund centers obligated less than $1 million from additional accounts: Counsel ($222,000 from Operations Support); Communications & Liaison ($92,000 from Taxpayer Services and $6,000 from Enforcement); Criminal Investigations ($38,000 from Operations Support); and Privacy, Governmental Liaison and Disclosure ($29,000 from Enforcement).

Appendix III: Summary of Major Information Technology Investments Reported in IRS’s Fiscal Year 2016 Congressional Justification

Appendix III: Summary of Major Information Technology Investments Reported in IRS’s Fiscal Year 2016 Congressional Justification Description Enhances customer support by providing applications that enable IRS employees to access, validate, and update individual taxpayer accounts on demand.

Encompasses the planning, development, and implementation of IT systems needed to support IRS’s tax administration responsibilities associated with the Patient Protection and Affordable Care Act.

Provides timely access to authoritative individual taxpayer account information and enhances IRS’s ability to address security, financial material weaknesses, and long-term architectural planning and viability.

Detects fraud at the time that tax returns are filed in order to eliminate the issuance of fraudulent tax refunds.

Comprises several web-based self-assisted services that are intended to allow authorized individuals to do business with the IRS electronically.

Intended to implement provisions of the Foreign Account Tax Compliance Act regarding financial institutions reporting to IRS information about financial accounts held by U.S. taxpayers, or foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Represents the authoritative data source for individual tax account data, supporting other IRS information systems and providing a critical component of IRS’s ability to process tax returns.

Intended to establish a new business information matching program in order to increase voluntary compliance and accurate income reporting.

Includes several projects that are intended to simplify voluntary compliance using telephone applications, Internet, and other computer technology.

Intended to provide systemic review, improve consistency in case control, alleviate staffing needs, issue notices to taxpayers, and allow taxpayers to see status of refunds.

Description Provides budget, payroll, accounts payable/receivable, general ledger functions, and financial reporting; also used to manage budgets by fiscal year.

Processes paper tax returns, and updates tax forms to comply with tax law changes.

Supports products and services necessary for daily functions for IRS employees at headquarters and field sites.

Supports the design, development, and deployment of server storage infrastructures, software, databases, and operating systems.

Supports IRS’s broad and local network infrastructure such as servers, and switches for voice, data, and video servicing of IRS sites.

Provides web-based services to internal and external users, such as IRS employees and other government agencies, taxpayers, and business partners.

Provides a secure web-based platform for electronic tax filing of individual and business tax and information returns by registered Electronic Return Originators.

Aims to maximize detection of fraud, including identity theft fraud, at the time that tax returns are filed, to eliminate issuance of questionable refunds.

Used as a data capture, management, and image storage system using high-speed scanning and digital imaging to convert data from the 940, 941, K-1, and paper returns from Information Returns Processing into an electronic format.

Provides online tools for taxpayers, such as Where’s My Refund and Get Transcript; supports search function and design of IRS.gov.

Appendix IV: GAO Budget-Related Recommendations to IRS That Remain Open

Report GAO-12-603 Conduct cost-effectiveness analyses Ensure cost-effectiveness analyses are conducted for future significant investments when there are alternative approaches for achieving a given benefit, such as for any new significant Patient Protection and Affordable Care Act (PPACA) projects.

Benefit Without cost- effectiveness analyses, budget decision makers do not have information to compare alternatives and it may be difficult to determine the best use of resources.

Status As of February 2015, IRS officials reported that for the fiscal year 2017 budget formulation process, they have developed new instructions and procedures for conducting cost-effectiveness analyses, which include considering trade-offs and alternatives of proposed investments. Also, they plan to conduct cost-effectiveness analyses for future significant nonenforcement initiatives when there are alternative approaches to achieving a given benefit and there is sufficient time to conduct the analyses, according to officials. IRS actions are consistent with what we recommended in June 2012; however, we cannot obtain documentation for the fiscal year 2017 budget formulation process because it is considered pre-decisional. When the data is available we will assess it.

GAO-12-603 Develop a quantitative measure of scope At a minimum, develop a quantitative measure of scope for its major IT investments, in order to have complete information on the performance of these investments.

A quantitative measure of scope is a good practice as it provides an objective measure of whether an investment delivered the functionality that was paid for.

No executive action taken. IRS officials stated that they agreed with the recommendation when we made it in June 2012. However, in October 2013, IRS said it did not plan to develop a quantitative measure of scope for its major information technology investments. In June 2014 and again in March 2015, IRS reported that it has practices and processes in place that provide performance information on its investments, including quarterly reports to Congress and a baseline change request process. However, neither approach includes a quantitative measure. For this reason, we maintain that the recommendation is still warranted.

Improve budget formulation guidance 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.

Expanding internal guidance for pre- selection budget formulation templates facilitates more complete information for internal budget decision-making.

IRS updated budget formulation guidance for the fiscal year 2016 budget formulation process. Guidance instructed business units to identify the expected benefit of the proposed budget initiative. We requested examples of completed templates to confirm the guidance was implemented by business units; however, as of mid-May, 2015 we have not received them. Once we receive the data, we will assess it.

Benefit Developing a cost estimate that meets additional best practices, will foster accountability, improve insight, and provide objective information.

Status In February 2015, IRS released version 3 of the PPACA cost estimate, which reflects best practices to a greater extent, as shown in appendix VII; however, IRS has taken action on only 2 of 5 elements of the recommendation. IRS has improved documentation of how cost drivers for its sensitivity analysis were selected with the score improving from “partially meets” to “meets.” While the score for variance from prior estimate improved, it went from “minimally meets” to “partially meets.” IRS has not improved its practices related to the use of earned value management, risk and uncertainty analysis, or validating the estimate. 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.

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

Reexamine programs, related processes, and organizational structures to determine whether they are effectively and efficiently achieving the IRS mission. Streamline or consolidate management or operational processes and functions to make them more cost-effective.

Developing a long-term strategy will enhance budget planning and improve decision making and accountability.

In June 2014, IRS established the Planning, Programming, and Audit Coordination office to, in part, improve long-term planning for resource allocation and decision making, and strategic planning. The Planning, Programming, and Audit Coordination office efforts will inform the fiscal year 2017 budget formulation process. We will continue to monitor IRS’s progress and will assess a strategy once it is developed.

Benefit Enhanced calculation of ROI provides greater insight on the productivity of a program and can inform decision making. implemented initiatives, compare the actual ROI to projected ROI, and provide the comparison to budget decision makers for initiatives where IRS allocated resources.

Use actual ROI calculations as part of resource allocation decisions.

Status IRS’s Research, Analysis, and Statistics Division has begun to estimate marginal direct revenues and marginal costs attributable to specific compliance projects within its correspondence exam program. It plans to use these estimates to inform potential exams, but considerable work remains in this long-term effort. Additionally, while IRS agreed that having actual ROI data would be useful, it did not believe it could determine a feasible estimate. We believe that IRS should be able to provide some information such as whether funds requested were used in the manner originally proposed. We will continue to monitor IRS’s progress.

Appendix V: List of Open Matters for Congressional Consideration and Recommendations to IRS That Could Result in Potential Savings or Increased Revenues

The 44 GAO products listed below contain 88 recommendations and 8 matters for congressional consideration that could have a financial impact if implemented.

Appendix VI: IRS Legislative Tax Proposals Related to Prior GAO Work

We conducted work related to 17 of the 35 legislative tax proposals included in the fiscal year 2016 congressional justification for IRS.

Appendix VII: PPACA Cost Estimate Assessment

The updated PPACA cost estimate–version 3—reflects best practices to a greater extent, as shown below. The cost estimate met or substantially met the criteria in three of four overall categories; however, a cost estimate must meet or substantially meet the criteria in all four overall categories to be considered reliable. Of 20 subscores, 12 increased, 3 decreased, and 5 were constant from our assessment of version 1 of the cost estimate.

Appendix VIII: Comments from the Internal Revenue Service

Appendix IX: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, the following staff made key contributions to this report: Libby Mixon, Assistant Director; Theodore Alexander; Amy Bowser; John E. Dicken; Jennifer K. Echard; Emile Ettedgui; Charles Fox; Robert Gebhart; Carol Henn; Melissa King; Edward Nannenhorn; Sabine Paul; Karen Richey; Bradley Roach; Robert Robinson; Erinn L. Sauer; Cynthia M. Saunders; Robyn Trotter; and Jim Wozny.