Madam Chairman and Members of the Subcommittee: We are pleased to be here today to participate in the Subcommittee’s inquiry into the Internal Revenue Service’s (IRS) actions to implement its fiscal year 1997 appropriation, the status of the 1997 tax return filing season, and the administration’s fiscal year 1998 budget request for IRS. This statement is based on our review of the administration’s fiscal year 1998 budget request, the interim results of our review of the 1997 tax return filing season, a review of IRS’ fiscal year 1997 spending plans for information systems, and our past work on Tax Systems Modernization (TSM). million dollars more for this effort in fiscal year 1997 than had been allocated. Given that and because IRS’ overall conversion needs are still being determined, it seems reasonable to question whether the amount requested for this effort in fiscal year 1998 will be sufficient. IRS is also requesting funds to replace two old systems used to process paper returns and remittances. Because extra money is being spent on those replacement systems in 1997, all of the funding being requested for 1998 may not be needed. The largest staffing increase in IRS’ budget request is for 195 FTEs (with an associated cost of $11 million) to process a projected increase in the number of tax returns filed in 1998. IRS expects that most of the additional returns will be filed electronically. Data IRS used to determine how much more money and staff it needed to process those additional returns show only a small difference between the number of FTEs needed to process a million electronic returns and the number needed to process a million paper returns. That small difference is inconsistent with what we would have expected and may reflect, at least in part, the fact that electronic filing is not truly paperless. Finally, IRS and Congress face many challenges in moving the nation’s tax system into the next millennium. Funding limits faced by IRS in fiscal year 1997 and anticipated for fiscal year 1998 are projected to continue until at least 2002. Fiscal constraints as well as longstanding concerns about the operations and management of IRS make consensus on IRS performance goals and measuring progress in achieving those goals critically important. The provisions and requirements of the Chief Financial Officers Act, Clinger-Cohen Act, and Government Performance and Results Act provide a mechanism for accomplishing this. levels, at a minimum; and (5) the need to develop a strategic plan and performance measures for inclusion in IRS’ fiscal year 1998 budget request. As shown in table 1, IRS’ final appropriation for fiscal year 1997 was $7.2 billion—$142 million less than its fiscal year 1996 appropriation. The fiscal year 1997 appropriation also rescinded about $174 million in information systems funds. Table 1 also shows that the fiscal year 1997 appropriation provided (1) all of what IRS requested for processing, assistance, and management; (2) $424 million less than requested for tax law enforcement; and (3) $365 million less than requested for information systems. In response to its fiscal year 1997 appropriation and the congressional direction specified therein, IRS (1) revised its spending plans for information systems; (2) reallocated resources within the processing, assistance, and management account to direct more resources to taxpayer service activities; and (3) reduced the number of compliance staff. $61.0 million for staff downsizing, and $21.9 million for telecommunication network conversion. IRS’ plans for spending its fiscal year 1997 information systems appropriation and IRS’ obligations through December 31, 1996, appear consistent with the act’s direction. Specifically, at the beginning of fiscal year 1997, we judgmentally selected eight projects, totaling approximately $197 million, that IRS planned to fund with its information systems appropriation and analyzed each relative to the categories and amounts specified in the act. Our analysis showed that IRS identified its projects in accordance with the legislative categories and that all of the projects we reviewed appeared to be consistent with the act’s categories and spending levels. In analyzing IRS’ spending, we also found that IRS has ongoing or completed over one-half of the projects (with fiscal year 1997 costs totaling about $87.3 million) that were used to justify the allocation of $130.1 million for systems development and deployment. IRS is reviewing one other project for $7 million and has canceled the remaining projects, which had projected fiscal year 1997 costs totaling about $36 million. According to IRS’ Chief Information Officer (CIO), IRS canceled these systems because business case analyses did not justify continued development. The canceled projects include the Corporate Accounts Processing System, the Integrated Case Processing System, and the Workload Management System. The CIO also stated that IRS does not plan to start any new system development projects until it has developed the internal capability needed to effectively manage system development projects, which includes developing a modernization systems architecture and a systems deployment plan. The CIO said that it would be 12 to 18 months before IRS begins acquiring and developing new systems. Therefore, Congress should consider rescinding the $36 million that IRS will not be using for systems development and deployment in fiscal year 1997. and IRS’ current downsizing plans include only 228 information systems positions. Given congressional concerns about the level of taxpayer service and the low level of telephone accessibility documented in our annual filing season reports, IRS decided that its highest priority in 1997, other than processing returns and refunds, would be to improve taxpayer service, especially the ability of taxpayers to reach IRS on the phone. One important step IRS took to achieve that end was to increase the number of FTEs devoted to taxpayer service. According to IRS estimates, the number of taxpayer service FTEs will increase from 8,031 in fiscal year 1996 to 9,091 in fiscal year 1997. The estimated number of FTEs for fiscal year 1997 is also higher than in fiscal year 1995, which is in accord with congressional direction in IRS’ fiscal year 1997 appropriation. According to IRS budget officials, some of these additional FTEs were achieved by reallocating resources originally targeted for submission processing; the rest were funded with user fees that IRS is authorized to retain. The bulk of the staffing increase for taxpayer service is directed at helping taxpayers reach IRS by telephone. To augment that increase, IRS has also been detailing staff from other functions to help answer the phone, including staff who would normally be doing compliance work. As discussed later, this increased staffing, along with other steps IRS took, seem to have succeeded in significantly improving telephone accessibility this filing season. staff that IRS has characterized as “representing the least efficient use of IRS resources on the margin.” By various statistical measures traditionally used to assess a filing season, the 1997 filing season is going well. Especially noteworthy are significant increases in electronic filing and telephone accessibility. One major change this year involves a new procedure IRS is using to deal with returns that have missing or incorrect Social Security Numbers (SSN). However, the impact of this procedure will not be evident until after the filing season. Another area that we cannot address at this time is refund fraud. IRS had not compiled data on the number of fraudulent returns and refunds identified this year as of the time we prepared this testimony. As of March 7, 1997, the number of returns filed electronically, including those filed over the telephone, was 24.7 percent more than at the same time last year. This increase is even more significant considering, as shown in table 2, that the total number of individual income tax returns filed as of March 7, 1997, was 1.5 percent less than at the same time last year. As table 2 shows, the largest percentage increase is in the number of returns filed by telephone (i.e., TeleFile). That increase may be due, in large part, to a change in the tax package IRS sent eligible TeleFile users this year. In past years, IRS sent taxpayers who appeared eligible to use TeleFile a package that included not only TeleFile materials but also a Form 1040EZ and related instructions. Thus, taxpayers who could not or did not want to use TeleFile had the materials they needed to file on paper, assuming they were still eligible to file a Form 1040EZ. This year, IRS eliminated the Form 1040EZ and related instructions from the package sent eligible TeleFile users—hoping that more taxpayers would be inclined to use TeleFile if they only received the TeleFile materials. A second noteworthy trend this year is an increase in the ability of taxpayers who have questions about the tax law, their refunds, or their account to reach IRS by telephone. As shown in table 3, the accessibility of IRS’ telephone assistance, as we have defined it in the past, has increased substantially. As table 3 indicates, the increase in accessibility is due to a combination of fewer calls coming in and more calls being answered. The two factors are not unrelated. The more successful IRS is in answering the phone, the fewer times taxpayers should have to call in an attempt to get through. IRS has another way of measuring accessibility, called “level of access”, which tracks the percentage of callers who were eventually able to get through to IRS rather than the number of call attempts. As of February 22, 1997, according to IRS data, the level of access was 71 percent, a substantial increase over the 52-percent level of access as of the same time last year. There are several factors that appear to have contributed to IRS’ increased telephone service: (1) an increase in the number of staff assigned to answer the phone, some of which was achieved by detailing staff from other IRS functions; (2) an attempt to reduce the need for persons to call IRS by eliminating certain notices that IRS deemed to be unnecessary; and (3) revisions to IRS’ procedures for handling calls.