IRS’s 2008 budget request proposes to increase spending. The $11.6 billion requested total operating budget is an increase of $608.8 million (almost 5 percent) over the FY 2007 level as shown in table 1. IRS proposes to fund 92,814 full-time equivalents (FTE), a slight decrease compared to the FY 2007 level. Table 1 summarizes IRS’s appropriation accounts and shows that its 2008 budget submission continues a trend of shifting spending toward enforcement. The request for $4.9 billion for direct enforcement appropriations is an increase of 3.9 percent over the FY 2007 level and almost 4.6 percent over the FY 2006 level. Table 1 also shows that IRS is requesting more funding for operational support in 2008 over the 2007 level. Among the reasons for the increased spending is that IRS is proposing to reduce the backlog of outdated information systems and telecommunications equipment. Finally, IRS is requesting $282 million for its BSM program—a significant increase in funding over both FYs 2006 and 2007. This includes over $55 million for developing and deploying the capability to accept individual income tax returns on Modernized e-File and $16 million for new Web portals to support key business processes and compliance initiatives. When operational support funding shown in table 1 is allocated to enforcement and taxpayer service, a more complete picture of what IRS actually spends on these activities emerges. Based on the allocation reported in the budget request, IRS plans to spend a total of $7.2 billion for enforcement and $3.6 billion for taxpayer service. Including operational support, IRS is requesting almost 56,600 FTEs for enforcement and about 35,200 FTEs for taxpayer service (an increase of 0.7 percent and a decrease of 3.7 percent, respectively, compared to FY 2007 levels). Figure 1 shows that this continues a trend since 2004 of shifting a greater portion of spending toward enforcement as compared to service. In years following passage of the IRS Restructuring and Reform Act of 1998, IRS made significant progress in taxpayer service, although there were declines in many aspects of enforcement activities, such as for enforcement staff and revenue collected as shown in figures 2 and 3, respectively, later in this statement. However, at FY 2008 requested levels, total spending for enforcement will increase by over 19 percent while spending for taxpayer service will decrease by almost 4 percent since 2004. In the 2008 budget submission, IRS proposes a number of new initiatives, all of which are intended to improve taxpayer compliance—some by increasing staffing for enforcement or making legislative changes, and some by improving taxpayer service or infrastructure. The request includes estimates of the annual costs of the initiatives plus, for some initiatives, dollar estimates of the increased revenue expected to be realized, as summarized in table 2. IRS recognizes that there are likely revenue effects beyond those shown in table 2. Table 2 shows, for example, the direct revenue from new enforcement initiatives. Direct revenue is the amount collected from taxpayers targeted by IRS enforcement actions, such as audits. However, the budget submission states that enforcement actions have indirect revenue effects as well by increasing voluntary compliance by all taxpayers. The magnitude of the indirect effects of enforcement is not known with a high level of confidence because of challenges in measuring compliance; developing reasonable assumptions about taxpayer behavior; and accounting for factors outside of IRS’s actions that can affect taxpayer compliance, such as changes in tax law. However, several research studies have offered insights to help better understand the indirect effects of IRS enforcement on voluntary tax compliance and show that they could exceed the direct effect of revenue obtained. Given the uncertainty of estimates of indirect revenue, in its budget request, IRS says that it cannot measure the impact of deterrence of enforcement or service on compliance, but only that their effects are positive. Finally, the budget request also recognizes that the initiatives intended to improve taxpayer service or modernize information systems are also expected to ultimately improve taxpayer compliance. Again, however, reliable information about the magnitude of the improvement is not available. Over the 3 years shown in table 2, IRS expects the estimated cost for the initiatives will decrease while the resulting direct revenue increases. IRS is requesting about $410 million for FY 2008 to fund all the initiatives, with the estimated costs declining in FYs 2009 and 2010 because of start-up costs in FY 2008. IRS is projecting that direct revenues will increase by about $2.6 billion in FY 2010, as more staff are hired, trained, and become more productive, and all aspects of the legislative initiatives are phased-in, particularly for the information reporting requirements. However, the direct revenues expected are small compared to the estimated $290 billion net tax gap for tax year 2001. For instance, the revenue-producing initiatives are expected to yield about $699 million in FY 2010, or about one-fourth of 1 percent of the tax year 2001 net tax gap. In 2010, the total estimated increased revenue from both the revenue-producing and legislative initiatives, about $2.6 billion, is about 0.9 percent of the 2001 net tax gap. No single approach, such as IRS enforcement, is likely to fully and effectively address noncompliance. Multiple approaches are needed because noncompliance has multiple causes and spans different types of taxes and taxpayers. Approaches include devoting additional resources to enforcement, providing more enforcement tools like information reporting, improving taxpayer service, periodically measuring compliance, setting tax gap reduction goals, leveraging technology to enhance IRS’s efficiency, and simplifying or reforming the tax code. For example, regarding information reporting, we recently recommended to IRS, that to assist taxpayers in accurately reporting their capital gains and losses from securities, in the instructions to Schedule D clarify the appropriate use of capital losses to offset capital gains or other income and provide guidance on resources available to taxpayers to determine their basis. Justifications for the new spending initiatives varied in the basic information they provided. In some cases, the budget submission lacked information that would have allowed us or others to assess the proposed spending and comment on, for example, whether the initiative would be a worthwhile expenditure in light of expected benefits and costs. To better understand IRS’s initiatives and their expected benefits and costs, we asked for supplementary documentation on selected new spending initiatives: Improve compliance among small businesses and self-employed (SB/SE) taxpayers: $73.2 million; 485 FTEs Critical upgrades to IT infrastructure: $60 million; 0 FTEs Improve tax gap estimates, measures, and noncompliance detection: $41.0 million; 258 FTEs Improve compliance for large multinational businesses: $26.2 million; 158 FTEs Research effects of taxpayer service on compliance: $5.0 million; 8 FTEs Expand volunteer income tax assistance (VITA): $5.0 million; 46 FTEs Our review of the justifications showed that some had descriptive, cost, and expected performance information while others lacked such information. Our previous work on results-oriented government and performance budgeting, states that budget requests and supporting documentation should provide information on the results to be achieved with the funding requested. More specifically, our work has shown that congressional decision makers benefit from information on the problem or performance shortfall to be addressed, cost estimates, and performance measures and goals. The justification for the initiative to upgrade IT infrastructure included information on the extent of the problem, including the impact of computer downtime on employee performance and how much IRS’s aged computer inventory would grow without additional funding. Similarly, the initiatives to increase compliance among SB/SE taxpayers and large multinational businesses had such information as the portion of the tax gap that is attributable to certain types of taxpayers, data on growth in certain tax return filings for businesses that are high-risk for underreporting, and the need for increasing enforcement activity in these areas. However, the justification for expanding VITA did not provide problem or performance shortfall information, such as evidence of how some taxpayers do not receive needed services due to the current level of spending or problems with those taxpayers’ compliance levels due to the lack of services. Similarly, the initiative to research the effects of taxpayer service on compliance did not explain the problem such research would correct. The IT initiative had information on the planned expenditures to upgrade specific computer equipment, including descriptions of the equipment and how it is to be used. Also, the initiatives to increase compliance among SB/SE taxpayers and large multinational businesses had descriptions of the types of staff to be hired and work to be done—such as examinations, collections, and legal support. However, the justifications for the initiatives to improve tax gap estimates and expand VITA lacked information on how IRS determined the amount requested or FTEs needed. We could not determine the budget or FTEs or specifics about the work to be done such as the number of examinations to be conducted. Further, the initiative to research the impact of service on compliance lacked descriptive details on the work to be done—such as potential research questions, methodologies, deliverables, and estimated costs of delivering them—that would provide examples of what IRS would accomplish with proposed spending and allow Congress or others to assess the initiative. The compliance initiatives had performance measures and goals, such as direct revenue to be generated or additional examinations to be conducted; the IT initiative had quantitative targets for reducing the aged computer inventory; the VITA initiative had a target for improving the quality of returns prepared by volunteers; and the tax gap estimate improvement initiative had quantitative targets related to examinations. However, the initiatives for researching the impact of service on compliance lacked a performance measure and target, such as, for improving the use of IRS resources based on the research. We do not contend that because some of the justifications were lacking in certain information that the initiatives are not worthwhile, or that all justifications should have the same extent and types of information. For example, although the justifications for conducting research to improve tax gap estimates and determine the effects of taxpayer service on compliance lacked certain information, in previous reports and testimony we have been supportive, in general, of such research.