The mission of IRS, a bureau within the Department of the Treasury, is to provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the federal tax laws with integrity and fairness to all. In carrying out its mission, IRS annually collects over $2 trillion in taxes from millions of individual taxpayers and numerous other types of taxpayers and manages the distribution of over $300 billion in refunds. To guide its future direction, the agency has two strategic goals: (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 has established seven overarching priorities to accomplish its mission: facilitate voluntary compliance by empowering taxpayers with secure and innovative services, tools, and support; understand non-compliant taxpayer behavior, and develop approaches to deter and change it; leverage and collaborate with external stakeholders; cultivate a well-equipped, diverse, skilled, and flexible workforce; select highest value work using data analytics and a robust feedback loop; drive more agility, efficiency, and effectiveness in IRS operations; and strengthen cyber defense and prevent identity theft. The mission of IRS’s Information Technology organization is to deliver IT services and solutions that drive effective tax administration to ensure public confidence. It is led by the Chief Technology Officer, who reports to the Deputy Commissioner for Operations Support of the IRS. Several subordinate offices report to the Chief Technology Officer. Figure 1 shows the structure of IRS’s Information Technology organization. IT plays a critical role in enabling IRS to carry out its mission and responsibilities. For example, the agency 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 public’s toll-free access to tax information. For fiscal year 2016, IRS is pursuing 23 major and 114 non-major IT investments to carry out its mission. These investments generally support (1) day-to-day operations (which include operations and maintenance, as well as development, modernization, and enhancements to existing systems), and (2) modernization efforts in support of IRS’s future goals. The day-to-day operations are primarily funded via the operations support appropriation account, user fees and other supplemental funding. The modernization efforts are funded via the business systems modernization appropriation account. IRS expects to spend about $2.7 billion for IT, including $2.2 billion in appropriated funds, $391.9 million in user fees, and $108.2 million in other supplemental funding. Approximately $1.4 billion of IRS’s IT funding for fiscal year 2016 supports the two operational investments (TSS and MSSS), and four development investments (FATCA, ACA, CADE 2, and RRP) that we selected for review. TSS supports IRS’s network infrastructure services such as network equipment, video conference service, enterprise fax service, and voice service for over 85,000 IRS employees at about 1,000 IRS locations. According to IRS, the investment continues delivery of services and products to employees which translates into service to taxpayers. IRS allocated approximately $366.6 million to activities supporting the TSS investment. Table 1 identifies the fiscal year 2016 funding allocation for the TSS investment, as well as the types of activities being funded. MSSS provides for the design, development, and deployment of server, middleware, and large systems as well as enterprise storage infrastructures, including systems software products, databases, and operating systems for these platforms. For fiscal year 2016, IRS allocated approximately $454.2 million for activities supporting the MSSS investment. Table 2 identifies the fiscal year 2016 funding allocation for the MSSS investment, as well as the types of activities being funded. FATCA is intended to improve tax compliance by identifying U.S. taxpayers that attempt to shield or divert assets by depositing funds in foreign accounts. A law enacted in 2010 requires foreign financial institutions to report to the IRS information regarding financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers have a substantial ownership interest. IRS allocated $89.1 million to FATCA for fiscal year 2016. ACA encompasses the planning, development, and implementation of IT systems needed to support IRS’s tax administration responsibilities associated with parts of the Patient Protection and Affordable Care Act. IRS allocated $311.2 million to ACA for fiscal year 2016. CADE 2 is intended to provide daily processing of taxpayer accounts. A major component of the program is a modernized database for all individual taxpayers that is intended to provide the foundation for more efficient and effective tax administration. In Transition State 2 of the initiative, the modernized database will become IRS’s authoritative source for taxpayer account data, as it begins to address core financial material weakness requirements for individual taxpayer accounts. Existing financial reports will be modified to take into account the increased level of detail and accuracy of data in the database. CADE 2 data will also be made available for access by downstream systems such as the Integrated Data Retrieval System for online transaction processing by IRS customer service representatives. IRS allocated $129.9 million to CADE 2 for fiscal year 2016. RRP is intended to deliver an integrated and unified system that enhances IRS’s capabilities to detect, resolve, and prevent criminal and civil tax noncompliance. In addition, it is intended to allow analysis and support of complex case processing requirements for compliance and criminal investigation programs during prosecution, revenue protection, accounts management, and taxpayer communications processes. IRS allocated $91.7 million to RRP for fiscal year 2016. Over the past several years, we have issued a series of reports which have identified opportunities for IRS to improve the management of its major IT investments. We reported in June 2012 that while IRS reported on the cost and schedule of its major IT investments and provided chief information officer ratings for them, the agency did not have a quantitative measure of scope–a measure that shows functionality delivered. We noted that having such a measure is a good practice as it provides information about whether an investment has delivered the functionality that was paid for. We recommended that IRS develop a quantitative measure of scope, at a minimum for its major IT investments, to have more complete information on the performance of these investments. In December 2015, IRS officials told us that they were exploring options to report scope and proposed an option in a December 2015 quarterly report on IT to Congress. We examined the suitability of proposed solutions for a quantitative measure of scope as part of this review. Further, in April 2013 we reported that the majority of IRS’s major IT investments were reportedly within 10 percent of cost and schedule estimates and eight major IT investments reported significant cost and/or schedule variances. We also reported that weaknesses existed, to varying degrees, in the reliability of reported cost and schedule variances, and key risks and mitigation strategies were identified. As a result, we made recommendations for IRS to improve the reliability of reported cost and schedule information by addressing the identified weaknesses in future updates of estimates. We also recommended that IRS ensure projects consistently follow guidance for updating performance information 60 days after completion of an activity and develop and implement guidance that specifies best practices to consider when determining projected amounts. IRS agreed with three of our four recommendations and partially disagreed with the fourth recommendation. The agency specifically disagreed with the use of earned value management data as a best practice to determine projected cost and schedule amounts, stating that the technique was not part of IRS’s current program management processes and the cost and burden to use it outweighed the value added. While we disagreed with IRS’s view of earned value management because best practices have found that the value generally outweighs the cost and burden of implementing it, we provided it as one of several examples of practices that could be used to determine projected amounts. We also noted that implementing our recommendation would help improve the reliability of reported cost and schedule variance information, and that IRS had flexibility in determining which best practices to use to calculate projected amounts. Finally, our February 2015 report found that most of IRS’s major IT investments reported meeting cost and schedule goals; however, selected investments experienced variances from initial cost, schedule, and scope plans that were not transparent in reports to Congress because IRS had yet to address our prior recommendations. Specifically, IRS had not addressed our recommendation to report on how delivered scope compares to what was planned, and also did not address guidance for determining projected cost and schedule amounts, or the reporting of cumulative cost and schedule performance information. IRS has identified priorities for operations and modernization but does not have a structured process for prioritizing among modernization efforts. Specifically, IRS has developed eight priority groups for operations, such as the delivering essential tax administration and taxpayer services group, and identified eight priority projects for modernization, including CADE 2 and RRP, to help reach IRS’s future state vision. In addition, IRS has developed a structured process for allocating funding to its operations support activities which is consistent with best practices. However, IRS has not fully documented this process. In addition, IRS does not have a similar structured process for prioritizing funding among its modernization activities, stating it does not have such a process because there are fewer competing activities than for operations support. A documented process for both operations support and modernization activities that is consistent with best practices would provide transparency into the process and provide greater assurance it is consistently applied. IRS has identified eight priorities—referred to as repeatable priority groupings—for its operations support activities. Officials told us that these priorities evolved from lessons learned in using priorities established the prior year and noted that they will continue to be refined over time. For example, in fiscal year 2015, activities associated with the tax filing season were identified as IRS’s top priority; however, in fiscal year 2016, IRS decided that infrastructure (i.e., telephones and computer servers) was essential in supporting tax processing and should thus be classified as IRS’s top priority. Each of the priority groupings includes several supporting business activities associated with major and non-major investments that IRS allocates funding to. Examples of such business activities include enterprise video conferencing service, and print support for taxpayer notices. These priorities and information related to these priorities are identified in order of importance, as determined by IRS, in table 3. IRS has also identified eight priority projects for modernization. These projects, as well as their descriptions and associated funding allocations are identified in table 4. According to GAO’s Information Technology Investment Management Framework, an organization should document policies and procedures for selecting new and reselecting ongoing IT investments. These policies and procedures should include criteria for making selection and prioritization decisions. A policy-driven, structured method for reselecting ongoing projects provides the organization’s investment board with a common understanding of how ongoing projects will be reselected for continued funding. In addition, executives funding decisions should be aligned with the selection decision. Specifically, the organization’s executives have discretion in making the final funding decisions on IT proposals. However, their decisions should be based upon the analysis that has taken place in the previous activities. Further, the Office of Management and Budget’s (OMB) Capital Programming Guide requires, among other things, that agencies have a disciplined capital programming process that addresses project prioritization and comparison of assets against one another to create a prioritized portfolio. In 2015, IRS developed and implemented a process known as the Portfolio Investment Planning process to prioritize its operations support activities. This process addresses (1) prioritization and comparison of IT assets against each other and (2) criteria for making selection and prioritization decisions. Further, senior IRS executives stated that the final funding decisions on IT proposals are based on IRS’s prioritization process. IRS uses priority groupings it has defined as criteria for making prioritized selections. Specifically, a consideration in determining if an activity (i.e., request for funding) will be selected is to determine the extent to which it supports any of eight priority groupings. If the activity is found to support one of the eight priorities, it is further assigned one of four priority levels: must do, high, medium, or low. IRS has defined the criteria that must be met in order to classify a funding activity at a particular priority level. Table 5 provides an example of the criteria used to make these decisions for the legislative provisions for the FATCA and ACA priority group. IRS prioritizes and compares IT assets against each other. Specifically, IRS business units identify line item activities for which they are requesting funding. For each activity, business units address, among other things, placement within IRS’s established priorities; proposed high-level capabilities and a cost estimate; a 1-year usable segment; and the date funding is needed and subsequent mitigation strategy if funding is not received by the specified date. Further, several meetings are held to review requested funding activities. According to IRS, the purpose of these meetings is to provide a cross- organization review and evaluation of IT-related demands. Stakeholders include Associate Chief Information Officers, business unit representatives, and staff from IRS’s IT Financial Management Service. Finally, IRS senior executives stated that its final funding decisions on IT proposals are based on IRS’s prioritization process. According to these officials, when the agency receives its appropriation, it evaluates prioritized activities—starting with the highest priority demands—until the total estimate of appropriated funding is allocated. Officials have discussions relative to the items that will not be funded and then engage the Office of the Chief Financial Officer to determine the extent to which user fees and other sources of funding are available to support priorities that exceed the appropriated amount. Prioritized activities, which have been allocated funding for the upcoming fiscal year, are presented to the Chief Technology Officer for approval. IRS’s Senior Executive Team approves the Chief Technology Officer’s funding recommendations and submits the recommendations to the Commissioner and Deputy Commissioners for final funding approval. Despite these strengths, IRS has not fully documented its process for prioritizing operations support activities. Specifically, while several documents describe aspects of the operations support prioritization process, including the criteria used and the meetings to review and evaluate IT related demands, none fully describe the procedures associated with the process. IRS officials stated this is because it is relatively new and not yet stabilized. IRS officials who are stakeholders in this process stated that documentation would have reduced the uncertainty they faced during implementation and would have helped them to better prepare the required data for the process. IRS senior executives stated they plan to fully document this process; however, they did not identify a time frame for when this would be done. Fully documenting IRS’s portfolio investment process for operational activities would help ensure consistent implementation of the process by all stakeholders and provide transparency regarding how such prioritization decisions are made. In contrast with operations support, IRS does not have a structured process for prioritizing funding among its modernization investments. Specifically, IRS officials stated that discussions are held to determine the modernization efforts that are the highest priority to meet IRS’s future state vision and technology roadmap. Officials reported that staffing resources and lifecycle stage are considered but there are no formal criteria for making final determinations. Senior IRS officials stated that they do not have a structured process for selection and prioritization of business systems modernization activities because the projects are set and there are fewer competing activities than for operations support. While there may be fewer competing activities, a structured, albeit simpler, process that is documented and consistent with best practices would provide transparency into IRS’s needs and priorities for appropriated funds. Such a process would better assist Congress and other decision makers in carrying out their oversight responsibilities. Of the six selected investments in our review, two development investments—FATCA and RRP—performed under cost, with varying schedule performance, and delivered most of the scope that was planned; however, performance information for these investments could be improved by implementing best practices for determining actual work performed. For portions of the two other development investments (CADE 2 and ACA) for which performance information was available, IRS reported completing work under planned cost and on time. However, neither investment reported information on planned versus actual delivery of scope, in accordance with best practices. Further, ACA did not report timely information on planned versus actual costs. Finally, one of the two investments in operations and maintenance (MSSS) met all operational performance goals, while the other investment in operations and maintenance (TSS) met six out of eight goals. Best practices highlight the importance of timely reporting on performance relative to cost, schedule, and scope (both planned and actual). According to these practices, one way to measure benefits of development work is to approximate by measuring a project’s actual cost and schedule progression (i.e., evaluating earned value), which is a measure of the amount of planned work that is actually performed in relation to the funds expended. IRS reported metrics for FATCA and RRP, which allowed us to determine these investments’ performance. The agency did not use such metrics or consistently develop planned and actual cost, schedule, and scope information for all CADE 2 and ACA projects and activities that were completed or ongoing during fiscal year 2015 and the first quarter of fiscal year 2016. As a result, we could only determine the performance of portions of these investments. FATCA and RRP: During fiscal year 2015 and the first quarter of fiscal year 2016, IRS reported quarterly cost, schedule, and scope performance information for each of the FATCA and RRP projects it was working on. Specifically, it reported metrics for these investments via its Investment Performance Tool. Table 6 summarizes the performance of the FATCA and RRP investments (see appendix II for detailed analyses). As shown in table 6, FATCA and RRP performed under cost, with varying schedule performance, and delivered most of the scope that was planned. Specifically, IRS was developing 10 projects to support the FATCA investment during fiscal year 2015 and the first quarter of 2016. IRS reported completing work at $12.4 million less than budgeted and delivering 91.7 percent of planned scope with an 8 percent schedule overrun for these projects. IRS stated that the reasons for these variances include, among other things, issues with the requirements management process; an overestimation of costs; and a reduction in the amount of work completed versus what was planned. IRS was developing three projects to support the RRP investment during fiscal year 2015 and the first quarter of 2016. IRS reported completing work at $24.5 million less than budgeted and delivering 99.9 percent of planned scope with a minor schedule overrun for these projects. IRS stated that the reasons for these variances include, among other things, overestimation of costs (including IRS labor) and unplanned work that needed to be completed. While the scope metric used for FATCA and RRP provides an indication of performance, this metric would be more reliable if it incorporated best practices for determining the amount of work completed for all activities. Specifically, IRS uses a level of effort method beyond the amount generally accepted by best practices to determine the amount of work completed by its own staff. Our Cost Estimating and Assessment Guide states that the level of effort method should be used sparingly (15 percent of the budget or less); however, the work performed by IRS staff ranged from 22 to 100 percent of the work completed for the FATCA and RRP projects that were ongoing during the time frame of our review. IRS officials stated that measuring value for government work is a vague concept to pursue. Nevertheless, revising the method for determining the amount of work completed by IRS staff for these investments would improve the reliability of the performance information. CADE 2 and ACA: For the CADE 2 projects that were completed during fiscal year 2015 and the first quarter of fiscal year 2016, IRS reported that CADE 2 performed on time and $1.7 million under planned cost. According to IRS, the positive cost variance for the CADE 2 investment is the result of overestimation of costs and the ability to reuse existing code. For the ACA activities that reported actual costs during fiscal year 2015 and the first quarter of 2016, IRS reported that ACA performed on time and $10.3 million under planned costs. IRS stated that this variance was primarily due to an overestimation of the labor needed to complete the planned work. Table 7 shows the reported cost and schedule performance for CADE 2 and ACA. With respect to CADE 2, IRS does not report timely information on planned versus actual delivery of scope. Specifically, a senior CADE 2 program official stated that, due to the nature of the methodology being used to implement the projects, progress in delivering planned scope cannot be determined until the end—after the testing phase. For CADE 2, projects can be 16 to 60 months long. We requested information from IRS regarding delivery of planned scope for those projects that completed during the time frame of our review; however, IRS was unable to provide this information. Regarding ACA, IRS does not report timely cost or scope information. A senior IRS official stated that the investment is being developed using an iterative approach, the goal of which is to deliver functionality in short increments. However, the agency does not report actual costs for the activities comprising the projects until the activities are completed; this delay in reporting could be as long as 9 months. Instead, ACA calculates a cost projection, which provides an estimate of cost to complete rather than cost of work completed, with which we have previously identified weaknesses. In addition, IRS only provided information on delivery of planned scope for one of the ACA projects it was developing during the timeframe of our review. Reporting of performance for the CADE 2 and ACA investments could be improved by incorporating best practices for timely reporting of cost, schedule, and scope performance information. As a result of the lack of timely and complete performance information, Congress and other external parties do not have pertinent information about CADE 2 and ACA with which to make oversight decisions. According to OMB’s Fiscal Year 2016 Capital Planning Guidance, ongoing performance of operational investments is monitored to ensure the investments are meeting the needs of the agency, delivering expected value, and/or modernized and replaced consistent with the agency’s enterprise architecture. To this end, OMB requires agencies to report on at least five operational metrics for major IT investments and agencies are specifically required to report on planned and actual operational performance. The two operations and maintenance investments in our review reported on operational performance metrics, as required. MSSS met its five operational performance goals during fiscal year 2015; however, TSS consistently underperformed on two of its eight metrics. Table 9 identifies the MSSS operational performance metrics, their descriptions, and the performance against these metrics during fiscal year 2015. IRS reported planned and actual performance for eight operational performance metrics for TSS during fiscal year 2015. However, as previously mentioned, TSS consistently missed operational performance goals for two of the eight metrics. The two TSS metrics that were not met illustrate pervasive challenges meeting its goals in deploying new telecommunications capabilities. Specifically, IRS missed every monthly target in fiscal year 2015 for deploying voice, video, and data technologies. As a result, TSS did not deploy such technologies to approximately 4,300 users that were originally included in the planned deployment. According to IRS officials, the operational performance goals for the two metrics that were not met should have been updated to better reflect the limited funding the agency intended to allocate to these activities. Table 10 identifies the TSS operational performance metrics, their descriptions, and the performance against these metrics during fiscal year 2015. While IRS has developed a process for prioritizing funding for operations support activities that adheres to best practices, it is not fully documented. Further, IRS has not developed a priority setting process for modernization activities for which the agency allocated nearly $300 million to for fiscal year 2016. Until IRS documents its process for operations support activities and develops a process for modernization activities, the agency will lack the transparency needed by Congress and others to assist in carrying out their oversight responsibilities. IRS has developed performance metrics for two investments—FATCA and RRP—which include a measure of progress in delivering scope, a measure we have been reporting on and recommending IRS address since 2012. While these metrics represent an important step, their reliability could be improved by incorporating best practices for measuring the work performed by IRS staff by using the level of effort measure sparingly. In addition, only partial performance information was available for CADE 2 and ACA because IRS did not use the metrics it is positioned to develop for these investments or consistently have cost, schedule, and scope information for these investments. Continued efforts in this area would substantially improve the performance reporting for the CADE 2 and ACA investments, and potentially for all major development efforts. To help IRS improve its process for determining IT funding priorities and to provide timely information on the progress of its investments, we recommend that the Commissioner of IRS direct the Chief Technology Officer to take the following four actions: document IRS’s process for selecting and prioritizing operations establish, document, and implement policies and procedures for selecting new and reselecting ongoing business systems modernization activities, consistent with IRS’s process for prioritizing operations support priorities, which addresses (1) prioritization and comparison of IT assets against each other, (2) criteria for making selection and prioritization decisions, and (3) ensuring IRS executives’ final funding decisions on IT proposals are based on IRS’s prioritization process; modify existing processes for FATCA and RRP for measuring work performed by IRS staff to incorporate best practices, including accounting for actual work performed and using the level of effort measure sparingly; and report on actual costs and scope delivery at least quarterly for CADE 2 and ACA. For these investments, IRS should develop metrics similar to FATCA and RRP. We provided a draft of this product to IRS for comment. In its written comments, reproduced in appendix III, IRS agreed with two recommendations, did not agree nor disagree with one, and disagreed with one. Specifically, IRS agreed with our recommendations to better document its prioritization process for operations support activities and extend that process to its business systems modernization activities. With respect to our recommendation to report on actual costs and scope delivery at least quarterly for CADE 2 and ACA, IRS did not agree nor disagree, but noted that IRS is continuing to try to improve its processes in reporting investment performance. Regarding our recommendation to modify existing processes for FATCA and RRP for measuring work performed by IRS staff to incorporate best practices, including accounting for actual work performed and using the level of effort measure sparingly, IRS disagreed and stated that modifying the use of the level of effort measure would equate to a certified earned value management system, which would add immense burden on IRS’s programs on various fronts and would outweigh the value it provides. However, we did not specify the use of an earned value management system in our report and believe other methods could be used to more reliably measure work performed. As noted in our report, 22 to 100 percent of the work for selected projects was performed by IRS staff. As a result, we believe that it is a reasonable expectation for IRS to reliably determine the actual work completed, as opposed to assuming that work is always completed as planned. Accordingly, we maintain our recommendation is still warranted. We are sending copies of this report to interested congressional committees, the Commissioner of IRS, and other interested parties. This report will also be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions on matters discussed in this report, please contact me at (202) 512-9286 or pownerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to (1) describe the Internal Revenue Service’s (IRS) current information technology (IT) investment priorities and assess IRS’s process for determining these priorities, and (2) determine IRS’s progress in implementing key IT investments. To address our first objective, we reviewed documentation, such as IRS’s fiscal year 2016 Business Systems Modernization Operating Plan, as well as financial reports to determine IRS’s IT funding priorities and funding allocations. In addition, we reviewed artifacts from IRS’s Portfolio Investment Planning process, such as slide decks describing key stages of the process, memorandums distributed to stakeholders, prioritized listings of investment activities, and criteria for establishing priorities, to identify and describe IRS’s process for determining its IT investment priorities. Further, we interviewed officials in IRS’s Office of Strategy and Planning, as well as stakeholders of the Portfolio Investment Planning process from IRS business units. We then analyzed IRS’s processes against best practices in our IT Investment Management Framework and the Office of Management and Budget’s Capital Programming Guide to determine the extent to which the processes met best practices and requirements. Lastly, we met with officials at the Department of the Treasury who are responsible for IT capital planning, including the Treasury Chief Information Officer, to determine the department’s role in IRS’s process for prioritizing IT funding. For our second objective, we analyzed the performance of four key development investments—Customer Account Data Engine 2 (CADE 2), Return Review Program (RRP), Foreign Account Tax Compliance Act (FATCA), and the Affordable Care Act Administration (ACA). Further, we analyzed two key operational investments —Telecommunications Systems and Support (TSS) and Mainframes and Servers Services and Support (MSSS). We chose these investments because they represented IRS’s most significant expenditures on development and operations for fiscal year 2015 ($496.5 million and $777.8 million, respectively). A tailored approach was necessary for analyzing the development investments given the varying types and extent to which performance information was available for these investments. To determine the progress in implementing FATCA and RRP, we compiled and analyzed quarterly output from IRS’s Investment Performance Tool for the period of fiscal year 2015 through the first quarter of 2016. IRS does not consider this tool to be a formal Earned Value Management System. As a result, we did not evaluate the extent to which the tool was compliant with the American National Standards Institute’s guidelines for an Earned Value Management System. For CADE 2, we analyzed IRS’s quarterly reporting of planned and actual costs, as well as requirements reports and schedule reporting. For ACA, we analyzed IRS’s financial reporting via the ACA business case submissions, as well as performance reporting to management and schedule reporting. In addition, we held multiple meetings with IRS officials, including officials in the CADE 2, FATCA, ACA, and RRP program offices. To determine the progress in implementing TSS and MSSS, we reviewed operational performance information reported for the selected investments from October 2014 to September 2015; this information included, where reported, the performance target and actual results for each metric. In addition, we reviewed documentation describing the performance metrics and interviewed IRS officials regarding the process for reporting such metrics. To determine the reliability of data used for our review, we obtained and reviewed IRS’s guidance for its Investment Performance Tool, which identifies, among other things, how data are to be entered within this tool, sources of such data, and explanations of the methods used to calculate performance metrics generated from the tool. Further, we held meetings with officials responsible for overseeing the use of IRS’s Investment Performance Tool. In addition, we relied on extensive work we previously completed on IRS’s financial management system for relevant data used for this review. In determining the reliability of the data supporting this review, we determined that data regarding the delivery of planned scope for the FATCA and RRP investments could be more reliable by incorporating best practices. While these data were sufficiently reliable for our purposes, we made recommendations to improve their reliability. We conducted this performance audit from September 2015 to June 2016 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. This appendix illustrates the potential for reporting complete performance information via IRS’s Investment Performance Tool. Specifically, the following tables provide a detailed evaluation of cost, schedule, and scope performance for Return Review Program and Foreign Account Tax Compliance Act projects that were being developed by IRS during fiscal year 2015 and the first quarter of fiscal year 2016. IRS reported working on three projects in support of Return Review Program during fiscal year 2015 and the first quarter of fiscal year 2016. The following tables identify the performance information reported via IRS’s Investment Performance Tool; positive cost variances indicate that the project was performing under planned cost and positive schedule variances indicate that the project was performing ahead of schedule. IRS reported working on 10 projects in support of Foreign Account Tax Compliance Act during fiscal year 2015 and the first quarter of fiscal year 2016. The following tables identify the performance information reported via IRS’s Investment Performance Tool; positive cost variances indicate that the project was performing under planned cost, and positive schedule variances indicate that the project was performing ahead of schedule. In addition to the individual named above, the following staff made key contributions to this report: Sabine Paul (Assistant Director), Bradley Roach (Analyst in Charge), Rebecca Eyler, Charles Hubbard III, Paul Middleton, Karl Seifert, and Marshall Williams, Jr.

Summary: IRS relies extensively on IT systems to annually collect more than $2 trillion in taxes, distribute more than $300 billion in refunds, and carry out its mission of providing service to America's taxpayers in meeting their tax obligations. For fiscal year 2016, IRS planned to spend approximately $2.7 billion for IT investments. Given the size and significance of these expenditures, it is important that Congress be provided information on agency funding priorities, the process for determining these priorities, and progress in completing key IT investments. Accordingly, GAO's objectives were to (1) describe IRS's current IT investment priorities and assess IRS's process for determining these priorities, and (2) determine IRS's progress in implementing key IT investments. To do so, GAO analyzed IRS's process for determining its fiscal year 2016 funding priorities, interviewed program officials, and analyzed performance information for six selected investments for fiscal year 2015 and the first quarter of 2016. The Internal Revenue Service (IRS) has developed information technology (IT) investment priorities for fiscal year 2016, which support two types of activities—operations and modernization. For example, it has developed priority groups for operations such as: (1) critical business operations, infrastructure operations, and maintenance; and (2) delivery of essential tax administration/taxpayer services. It has identified priorities for modernization, such as web applications, to help reach IRS's future state vision. However, while IRS has developed a structured process for allocating funding to its operations activities consistent with best practices, it has not fully documented this process. IRS officials stated this is because the process is relatively new and not yet stabilized. In addition, IRS does not have a structured process for its modernization activities, because, according to officials, there are fewer competing activities than for operations activities. Fully documenting a process for both operations support and modernization activities that is consistent with best practices would provide transparency and greater assurance it is consistently applied. Of the six investments GAO reviewed, two investments—Foreign Account Tax Compliance Act and Return Review Program—provided complete and timely performance information for GAO's analyses. These investments performed under cost, with varying schedule performance, and delivered most planned scope (see table). However, IRS did not always use best practices for determining scope delivered. Specifically, IRS used a method inconsistent with best practices for determining the amount of work completed by its own staff. Two other investments reported completing portions of their work on time and $1.7 million under planned costs (for the Customer Account Data Engine 2), and on time and $10.3 million under planned costs (for Affordable Care Act Administration). However, neither investment reported information on planned versus actual delivery of scope in accordance with best practices. The remaining two investments—Mainframes and Servers Services and Support and Telecommunications Systems and Support—generally met performance goals. GAO is recommending that IRS develop and document its processes for prioritizing IT funding and improve the calculation and reporting of investment performance information. IRS agreed with two recommendations regarding its prioritization processes, disagreed with one related to the calculation of performance information, and did not comment on one recommendation. GAO maintains all of the recommendations are warranted.