IRS is in the midst of reorganizing and reengineering its major technological, organizational, operational, and financial processes. Through its reengineering efforts and Tax Systems Modernization (TSM) program, IRS plans to introduce new technology to support these and other changes directed toward making it a more efficient organization. However, as a result of tighter budgets and increasing congressional concern over the pace of its modernization, IRS is rethinking its business vision and rescoping its planned changes. Tax Systems Modernization: Progress in Achieving IRS’ Business Vision (GAO/T-GGD-96-123, May 9, 1996). In hearings before the Senate Governmental Affairs Committee, we described IRS’ progress toward achieving its vision for improving its operations by the year 2001 and its plans for using TSM in support of that vision. IRS’ vision calls for organizational, technological, and operational changes in processing tax returns, providing customer service, and ensuring compliance with tax laws. IRS has made some progress in modernizing its operations but still falls far short of its vision. One of the biggest problems facing IRS has been its inefficient system for processing most tax returns. It had not significantly reduced the number of paper returns it processes, nor had it delivered the new systems needed to process paper documents more efficiently. IRS’ efforts to improve customer service have also fallen short. Even if taxpayers were able to reach IRS, agency assistors did not always have the information readily available to answer their questions, and IRS has been slow in changing work processes and implementing new information systems. Furthermore, budget reductions and concerns over taxpayer burden led IRS to cancel or postpone certain programs that were intended to help improve compliance. Until IRS successfully modernizes its processes and operations, we do not believe it will achieve its business vision. Managing IRS: IRS Needs to Continue Improving Operations and Service (GAO/T-GGD/AIMD-96-170, July 29, 1996). In our first statement before the National Commission on Restructuring the Internal Revenue Service, we shared some of the long-standing challenges that IRS faces as it strives to improve its organization, operation, processes, and customer service. These challenges include the inefficient manner in which IRS processes most tax returns; the managerial, technical, and human resource obstacles that hinder IRS from fulfilling its customer service vision; the problems that continue to undermine the effectiveness of IRS’ collection programs; the need to resolve serious financial management problems that affect the reliability of its financial statements; and the need to better coordinate its reengineering efforts, which could generate new business requirements that are not addressed by TSM projects or that make some of those projects obsolete. Financial Audit: Examination of IRS’ Fiscal Year 1995 Financial Statements (GAO/AIMD-96-101, July 11, 1996). In accordance with the Chief Financial Officers Act of 1990, this report to Congress presented the results of our efforts to audit IRS’ Principal Financial Statements for fiscal years 1995 and 1994. The report discussed IRS’ continuing financial management problems in such areas as reconciling taxpayer revenue and refund accounts, substantiating the amounts of various types of taxes it collects, verifying nonpayroll operating expenses, and reliably reporting its accounts receivable balances. It also described IRS’ weaknesses in its controls over recordkeeping and computer security, and it contained our formal opinions and reports on IRS’ financial statements, internal controls, and compliance with laws and regulations. IRS data indicate that the portion of the gap between taxes owed and paid that can be attributed to individual taxpayers amounts to about $94 billion per year. Of that amount, the failure to report income accounts for about $73 billion. Tax law changes as well as changes to IRS’ taxpayer guidance could increase compliance by making it easier for taxpayers to comply with tax laws. Changes in IRS’ enforcement programs could make these programs more effective and less intrusive on taxpayers. Businesses play a significant role in our tax system. They not only pay income taxes but are also responsible for providing information to taxing authorities about payments to individuals and for withholding income and Social Security taxes from employees’ salaries. IRS data indicate that the portion of the tax gap attributable to corporate taxpayers amounts to about $33 billion per year. Of this amount, large corporations account for about $24 billion, and small corporations account for about $7 billion. Businesses, particularly large corporations, also spend considerable sums of money resolving disputes with IRS over audit results. Internal Revenue Service: Results of Nonfiler Strategy and Opportunities to Improve Future Efforts (GAO/GGD-96-72, May 13, 1996). Our report to the Commissioner of Internal Revenue discussed our review of IRS’ strategy, which began in fiscal 1993, to bring an estimated 10 million individual and business nonfilers back into the system and keep them there. We assessed the results of IRS’ strategy and determined whether opportunities existed to improve any future nonfiler efforts. According to IRS, the Nonfiler Strategy was generally a success. The agency (1) reduced the size of the nonfiler inventory; (2) eliminated unproductive cases, which allowed it to focus enforcement resources more effectively; and (3) increased the number of returns secured from individual nonfilers. However, although IRS achieved its goal of reducing the backlog of nonfiler investigations, it was unclear how much, if at all, voluntary taxpayer compliance improved as a result of the strategy. The absence of comprehensive cost data made it difficult to assess the return on IRS’ investment. We identified several areas in which opportunities existed to improve any future effort directed at nonfilers. These opportunities related to (1) the time it took IRS to make telephone contact with nonfilers; (2) the use of higher graded staff to perform tasks that might have been effectively performed by lower graded staff; and (3) procedures for dealing with recidivists—that is, nonfilers who were brought into compliance and then became nonfilers again. We also recommended establishing measurable goals and developing comprehensive data on program costs. Tax Administration: IRS Is Improving Its Controls for Ensuring That Taxpayers Are Treated Properly (GAO/GGD-96-176, Aug. 30, 1996). In this report to the Chairman of the Senate Finance Committee, we addressed continuing allegations of taxpayer abuse by IRS employees years after the enactment of the Taxpayer Bill of Rights in 1988. We studied the adequacy of IRS’ controls to protect against taxpayer abuse; the extent of information available concerning abuse allegations received and investigated by IRS, the Department of the Treasury’s Office of Inspector General (OIG), and the Department of Justice; and the role of the Inspector General in investigating abuse allegations. Owing to the lack of specific data elements on taxpayer abuse in the information systems at IRS, Treasury’s OIG, and the Department of Justice, we were unable to determine the adequacy of IRS’ system of controls that are used to identify, address, and prevent instances of abuse. However, we were encouraged by IRS’ decision to develop a taxpayer complaint tracking system that essentially adopts the definition of taxpayer abuse that is included in our 1994 report. IRS’ “Customer Service Vision” guides its efforts to improve customer service. The vision is founded on increased accessibility, including up-front problem identification, improved notices and publications, telephone interaction in lieu of correspondence, one-stop service, and blended work groups. As part of this effort, IRS is identifying new ways to improve service and developing systems to support this service. Tax Administration: IRS Faces Challenges in Reorganizing for Customer Service (GAO/GGD-96-3, Oct. 10, 1995). As part of our continuing efforts to provide Congress with the information and analyses it needs to improve IRS’ tax administration, we reviewed the progress IRS was making toward achieving its customer service vision. Our report discussed (1) IRS’ goals for customer service and its plans to achieve them, (2) the gap between current performance and these goals, (3) agency progress to date, (4) current management concerns, and (5) several important challenges IRS faces. We found that although IRS had made some progress toward its customer service vision, the agency’s lack of clarity in management responsibilities had, to some extent, hampered its ability to implement its customer service plans. IRS expects to improve its customer service by having fewer work locations and automated workload management, giving customer service representatives better access to taxpayer accounts, improving taxpayer accessibility to telephone service, and allowing taxpayers to resolve their inquiries after a single telephone contact. IRS has been particularly slow, however, in improving taxpayer accessibility and reassigning staff to customer service centers. IRS needs to determine how to manage the transition to a different organization while maintaining its ongoing workload, decide what the role of customer service representatives will be, develop and effectively use new information technology, and devise ways to measure the work of new customer service centers and balance their competing workloads. We recommended that IRS assign ownership and clearly define roles and responsibilities for its projects and emphasize the need to develop, test, and implement new customer service products and services. Tax Administration: Making IRS’ Telephone Systems Easier to Use Should Help Taxpayers (GAO/GGD-96-74, Mar. 11, 1996). At the request of the House Subcommittee on Oversight, Committee on Ways and Means, we reviewed IRS’ development and use of interactive telephone systems to improve customer service, focusing on IRS’ efforts to make the telephone systems easier to use, protect taxpayer data, and assign responsibility for providing developers with systems requirements information. Three prototype interactive telephone systems—designed to reduce correspondence between IRS and taxpayers and to make the agency more accessible—suffered from too many menu options and other problems. Future interactive systems may require more safeguards to protect taxpayer data. Resolving the shortcomings in the current systems is essential if IRS is to achieve its goal of increasing interactive telephone assistance to 45 percent of taxpayers’ calls.