Fiscal Year 2002 Budget Request for the Internal Revenue Service 
(01-MAY-01, GAO-01-698R).					 
								 
For fiscal year 2002, Congress has before it two separate budget 
requests for the Internal Revenue Service (IRS)--the traditional 
request prepared by the administration and a separate request	 
prepared by the IRS Oversight Board. There are some significant  
differences between the two requests. The administration is	 
requesting about $9.4 billion while the Board is requesting an	 
additional $300 million. This correspondence addresses several	 
questions related to (1) the differences between the two	 
requests, (2) IRS' hiring plans for its Staffing Tax		 
Administration for Balance and Equity initiative, (3) the	 
productivity of IRS staff, and (4) business systems		 
modernization.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-698R					        
    ACCNO:   A00961						        
  TITLE:     Fiscal Year 2002 Budget Request for the Internal Revenue 
             Service                                                          
     DATE:   05/01/2001 
  SUBJECT:   Customer service					 
	     Tax administration systems 			 
	     Financial analysis 				 
	     Personnel recruiting				 
	     Information resources management			 
	     Systems conversions				 
	     Human resources utilization			 
	     IRS Staffing Tax Administration for		 
	     Balance and Equity Initiative			 
								 

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GAO-01-698R
     
Page 1 GAO- 01- 698R IRS? FY 2002 Budget United States General Accounting
Office

Washington, DC 20548

May 1, 2001 The Honorable Amo Houghton Chairman, Subcommittee on Oversight
Committee on Ways and Means House of Representatives

Subject: Fiscal Year 2002 Budget Request for the Internal Revenue Service
Dear Mr. Chairman: In response to a request for information on the Internal
Revenue Service?s (IRS) budget for fiscal year 2002, this letter addresses
the following topics: (1) the administration?s fiscal year 2002 budget
request for IRS, including a comparison to a separate budget request
submitted by the IRS Oversight Board; (2) the Staffing Tax Administration
for Balance and Equity (STABLE) initiative, which is intended to enhance
IRS? customer service and compliance efforts; (3) opportunities for
improving IRS? performance by increasing staff productivity; and (4)
business systems modernization. Information in this letter is based on our
review of the congressional justification submitted by IRS in support of the
administration?s budget request; IRS? annual performance plan for fiscal
year 2002; a document prepared by the Oversight Board, entitled The IRS
Budget, Fiscal Year 2002; a STABLE staffing plan prepared by IRS; and other
data we obtained from IRS.

In summary, the administration is requesting about $9.4 billion for IRS for
fiscal year 2002. The Oversight Board is asking for about $300 million more.
The Board?s request exceeds the administration?s in three broad areas: (1)
business systems modernization, (2) improvement projects, and (3) operating
costs. Our review of the administration?s and Board?s budget requests for
IRS identified several questions related to (1) differences between the two
requests, (2) IRS? hiring plans for STABLE, (3) the productivity of IRS
staff, and (4) business systems modernization that the subcommittee may wish
to raise to IRS and/ or the Board. Those questions are set out at the end of
each subsection of this letter.

We sent a draft of this letter to the Internal Revenue Service and the
Oversight Board for their review. They generally agreed with the factual
data presented herein.

Fiscal Year 2002 Budget Requests for IRS

For fiscal year 2002, Congress has before it two separate budget requests
for IRS- the traditional request prepared by the administration and, for the
first time, a separate request prepared by the IRS Oversight Board. There
are some significant differences between the two requests.

The administration?s request includes about $9.4 billion and 101,352 full-
time equivalent (FTE) staff years for IRS. As shown in table 1, that request
represents a 6.6- percent increase

GAO- 01- 698R IRS? FY 2002 Budget Page 2 in dollars and a 1.9- percent
increase in FTEs compared to IRS? fiscal year 2001 operating

level.

Table 1: Administration?s Fiscal Year 2002 Budget Request for IRS and IRS?
Fiscal Year 2001 Operating Level, by Appropriation

(Dollars in thousands)

Fiscal year 2002 budget request Fiscal year 2001

operating level Dollar change FTE change IRS appropriation Dollars FTEs
Dollars FTEs Amount % Amount %

Processing, Assistance, and Management (PAM) $3,783,347 44,456 ]$ 3,694,081
43,169 $89,266 2. 4 1,287 3.0 Tax Law Enforcement (TLE) 3, 533,198 47,082 3,
381,590 46,526 151,608 4. 5 556 1.2 Information Systems 1, 563,249 7,578
1,548,781 7,578 14,468 0. 9 0 0 Business Systems Modernization 396,593 0
71,593 0 325,000 a 454 0 0 Earned Income Tax Credit 146,000 2, 236 144,681
2, 236 1,319 0.9 0 0

Total $9,422,387 101,352 $8,840,726 99,509 $581,661 6.6 1, 843 1.9

a This comparison does not take into account any modernization funds that
were appropriated before fiscal year 2001 and were still available for
obligation in fiscal year 2001.

Source: IRS? Congressional Justification for Fiscal Year 2002.

All but 21 of the additional 1,843 FTEs being requested in the PAM and TLE
appropriations and a large portion of the dollar increases in those two
appropriations are for the STABLE initiative. 1 As discussed later, IRS
plans to have all of the additional staff authorized by STABLE on board by
the end of fiscal year 2001. The dollars and FTEs requested for STABLE in
fiscal year 2002 are not intended for additional hirings but rather to cover
the full year?s cost of staff who are to be hired in fiscal year 2001.

The enclosure to this letter shows how IRS has allocated its budget request
among its new organizational units. IRS provided that information with the
understanding that the allocation could change as circumstances and needs
change.

As required by the IRS Restructuring and Reform Act of 1998, the IRS
Oversight Board has also submitted a budget for IRS. That budget calls for
appropriating $9.7 billion to IRS for fiscal year 2002- about $300 million
more than requested by the administration. Differences between the
administration and the Board follow:

 The Board is requesting $450 million for business systems modernization in
fiscal year 2002, or $53 million more than the administration?s request of
$397 million. According to the Board, the administration?s request would
?slow down a program that is already taking far too long.?

 The Board is requesting $137 million for improvement projects, or $97
million more than the administration?s request of $40 million. According to
the Board, the most critical difference is $54 million for upgrading desktop
and laptop computers to

1 The other 21 FTEs are for IRS? portion of a national counterterriorism
initiative.

GAO- 01- 698R IRS? FY 2002 Budget Page 3 support the rollout of software
that will provide improved functionality for IRS

employees and enhanced security.

 The Board?s budget includes $137 million for operating costs that it says
are not funded in the administration?s budget. Those costs include non-
labor inflation costs, mandated pay raises for technology professionals, and
the ?higher costs of an older work force.? According to the Board, failure
to fund those costs puts full implementation of STABLE at risk. The
administration?s request refers to only $57 million in unfunded costs, which
it believes can be offset through improved resource management.

In addition to the differences discussed above, the Board?s budget includes
a $550 million advance appropriation for fiscal year 2003 for business
systems modernization. The administration?s budget includes no advance
appropriation.

Following are several questions related to the budget requests for IRS that
the subcommittee may wish to pursue.

Questions for Oversight For fiscal year 2002, the Board?s recommended
funding for business systems modernization is about $53 million, or 13
percent, more than the administration?s. The Board indicates that the $53
million is needed to fully carry out fiscal year 2002 initiatives for which
IRS already has detailed plans in place.

 What would be the consequence of IRS? not receiving the additional
funding?

 If IRS were given the additional $53 million, what specific projects would
be funded and what would be the benefits of those projects?

The Board is recommending $97 million more than the administration for
improvement projects ($ 137 million versus $40 million). One project
included in the Board?s increase is the upgrading of desktop and laptop
computers that, according to the Board, are needed to support the rollout of
software that provides improved functionality for IRS employees and enhanced
security.

 What adverse affect, if any, would IRS experience from not receiving the
additional funds recommended by the Board?

 Is the Board correct in asserting that IRS? current computers cannot run
software that has already been purchased or developed? If it is and IRS does
not receive funding for the computer upgrade, how will IRS ensure that the
software can be used for the purposes intended?

The administration estimates that inflationary increases in non- pay
expenditures and certain other costs will occur in fiscal year 2002 but
indicates that these increases will be offset through improved resource
management. The Board does not suggest that improved resource management can
offset these increased costs but suggests, instead, that failure to fund
those costs puts full implementation of STABLE at risk.

 What is the correct amount of unfunded operating costs- the $137 million
cited by the Board or the $57 million referred to in the administration?s
request?

 Does the Board disagree with the administration?s conclusion that unfunded
costs can be covered through improved resource management? If so, why?

GAO- 01- 698R IRS? FY 2002 Budget Page 4

 What specific improvements is IRS anticipating that would offset these
increased costs? If those improvements are not realized, how will any
shortfall be covered?

 How, if at all, will these unfunded costs affect IRS? ability to implement
the STABLE staffing plan approved by the Appropriations Committees in
February 2001?

The STABLE Initiative

For fiscal year 2001, Congress provided IRS with $141 million for an
initiative, known as STABLE, that is intended to improve customer service
and enhance IRS? tax compliance efforts. Before obligating any of those
funds, IRS was required to obtain approval of a staffing plan from the
Senate and House Appropriations Committees. IRS submitted its plan in
December 2000 and submitted additional information in February 2001. The
Senate and House Committees approved the plan on February 19 and 13, 2001,
respectively. According to the staffing plan, the $141 million would allow
IRS to fund 2,036 FTEs in fiscal year 2001, and IRS would hire staff to fill
those positions throughout the fiscal year, with some staff being hired
before December 2000. According to a cognizant IRS official, however,
because the staffing plan was not approved until February 2001, the hiring
schedule was revised. Details on the revision were not available at the time
we finalized this letter.

IRS? staffing plan included the following detail on how the 2,036 FTEs would
be allocated among IRS? various activities:

 293 FTEs to assist taxpayers in understanding their tax responsibilities
and preparing accurate returns.

 981 FTEs to assist taxpayers in filing returns, receiving refunds, making
payments, and resolving questions about their accounts, of which 755 FTEs
were for telephone assistance and 226 FTEs were for field assistance. Many
of these FTEs were intended to allow IRS to reduce its reliance on
compliance staff to help provide customer service.

 384 FTEs to bring taxpayers into compliance with the tax laws, including
204 FTEs for telephone collection, 138 FTEs for document matching, and 42
FTEs for field examinations.

 378 FTEs for processing schedule K- 1s submitted on paper. 2 According to
IRS? staffing plan, it actually expects to hire 3,858 staff for STABLE in
fiscal year 2001. However, because those staff will be hired throughout the
fiscal year and thus work only part of the year, the number of FTEs in
fiscal year 2001 will be only 2,036. To cover the costs associated with
paying those 3,858 staff for a full year in fiscal year 2002 compared to
part of a year in 2001, IRS is requesting an additional $86.4 million.

According to IRS, the increased staff provided by STABLE will enable IRS to,
among other things,

 improve the level of service provided to taxpayers over the telephone;

 increase the number of overdue accounts closed by telephone collectors;
and 2 Schedule K- 1s are filed in conjunction with returns filed by trusts,
partnerships, and S- corporations. Those returns are referred to as flow-
through returns because they pass their income through to beneficiaries,
partners, and shareholders. Schedule K- 1s show the amount passed through to
a particular beneficiary, etc.

GAO- 01- 698R IRS? FY 2002 Budget Page 5

 primarily by freeing up compliance staff who have been detailed to help
provide assistance during the tax filing seasons, 3 increase the number of
returns examined and the number of overdue accounts closed by field office
collectors.

As shown in table 2, those expectations are reflected in IRS? performance
plan for fiscal year 2002.

Table 2: Selected IRS Performance Measures for Fiscal Years 2000 Through
2002 Fiscal year Measure 2000 actual 2001 plan 2002 plan

Total number of individual returns filed 127,684,000 130,210,000 132,257,000
Toll- free level of service a 59.1% 63.4% 71.1% Number of delinquent
accounts closed by the Automated Collection System 1,532,309 1,655,000
1,871,510 Number of delinquent account cases closed by field collection
771,455 846,800 862,564 Total number of individual returns examined 690,591
825,318 860,801

Number of correspondence examinations 439,483 558,655 519,664 Total
individual returns examined by office or field audit 251,108 266,663 341,137
Audit coverage b 0.49 0.65 0.66 Total enforcement revenue collected $33.8
billion $34 billion $34.9 billion a According to IRS, ?toll- free level of
service? measures the success rate of taxpayers who wish to speak to an

assistor. Thus, it excludes calls routed to automated systems, such as
Teletax. b IRS? performance plan for fiscal year 2002 includes no measure
for audit coverage. To compute this measure,

we divided the total number of individual returns examined in a particular
year by the total number of individual returns filed the prior year.

Source: IRS Annual Performance Plan for fiscal year 2002, and GAO
calculations.

As noted earlier, part of IRS? plan is to use customer service staff hired
under STABLE to reduce the reliance on compliance staff to help provide
customer service. Our ongoing review of IRS? 2001 tax filing season for the
subcommittee has generated some evidence that IRS has been successful in
that regard. For the period January 1 through April 14, 2001, according to
IRS, field assistance offices used 774 FTEs, of which about 25 percent were
compliance FTEs. That compares to the same period in 2000, when the field
assistance offices used 873 FTEs, of which about 42 percent were from
compliance.

Following are several questions related to STABLE. Questions for Oversight
The administration is requesting $86.4 million for fiscal year 2002 to fully
fund the costs of 3,858 staff under the STABLE initiative. However, if the
estimated cost per STABLE FTE in fiscal year 2001 is projected to fiscal
year 2002, it appears that the administration?s request would have to be
increased by about $40 million to fully fund the 3,858 FTEs.

3 According to IRS? congressional justification for fiscal year 2002, (1)
IRS has, in recent years, detailed about 1,200 FTEs from examination and
collection duties to customer service to meet filing season workload peaks
in the telephone and walk- in programs, and (2) the STABLE initiative was
designed, in part, to reduce that reliance on compliance staff by 50
percent.

GAO- 01- 698R IRS? FY 2002 Budget Page 6

 If IRS needs $141 million to fund 2,036 FTEs in fiscal year 2001 (i. e.,
$69,253 per FTE), how will it be able to fund 1,822 additional FTEs in
fiscal year 2001 with only $86.4 million (i. e., $47,420 per FTE)?

The Appropriations Committees approved IRS? STABLE staffing plan in February
2001 based on information provided by IRS in December 2000 and January 2001.
The plan indicated that IRS would be hiring staff throughout fiscal year
2001, with some staff being hired before December 2000.

 How has IRS? staffing plan been affected by the fact that information on
the plan was not delivered to the Appropriations Committees and thus not
approved until after IRS had expected to begin hiring the staff authorized
under STABLE? If IRS had to delay certain hirings until later in fiscal year
2001, what has IRS done or will IRS do with that portion of the $141 million
appropriated for STABLE in fiscal year 2001 that would seemingly be saved by
those delayed hirings?

According to IRS, STABLE is intended to help increase the number of returns
audited. However, data in IRS? performance plan imply a 0.65- percent audit
rate for individual returns in fiscal year 2001 and a 0.66- percent audit
rate for fiscal year 2002. Although these rates are higher than the 0.49-
percent audit rate achieved in fiscal year 2000, they would remain far below
rates achieved before fiscal year 2000.

 Is a 0.65- or 0.66- percent audit rate for individual returns sufficient
to adequately ensure compliance with the tax law? If not, how much higher
should the rate go, and what specific plans does IRS have to achieve a
higher rate?

 Does the 0.65- or 0.66- percent audit rate fairly reflect the level of
effort IRS devotes to ensuring that individual taxpayers comply with the tax
law? If not, what IRS compliance efforts are not included in computing the
audit rate, and how would inclusion of those efforts change the audit rate?

Opportunities for Further Improvement Through Increased Productivity

In our testimony on IRS? fiscal year 2001 budget request before this
Subcommittee, we were generally supportive of the STABLE initiative. 4 In
general, we believed that the areas for which additional staff were being
requested were areas of need. For example, the plan to allocate additional
staff to the processing of schedule K- 1s so that data on those schedules
could be reconciled with information reported on individual income tax
returns was consistent with a recommendation we made in 1995. 5 IRS? intent
to use the increase in customer service staff hired through STABLE to reduce
the need to detail compliance staff to help provide assistance during the
filing season also addressed, to some extent, concerns over declining audit
rates and tax collection activities. Reducing the reliance on compliance
detailees should allow compliance staff to concentrate on doing the kind of
audit and collection work for which they had been hired and trained.
Likewise, a person who has been hired and trained for a customer service
position should be able to better assist taxpayers than a person who has
been hired and trained to audit returns or collect taxes.

4 Tax Administration: IRS? 2000 Tax Filing Season and Fiscal Year 2001
Budget Request (GAO/ TGGD/ AIMD- 00- 133, Mar. 28, 2000). 5 Tax
Administration: IRS? Partnership Compliance Activities (GAO/ GGD- 95- 151,
June 16, 1995).

GAO- 01- 698R IRS? FY 2002 Budget Page 7 Last year, we took exception to one
part of the STABLE initiative- increasing the number of

resources devoted to answering the telephone. We questioned that part of the
initiative not because there was no need to improve telephone service but
because the improved level of service IRS said would be realized as a result
of the staffing increase was below the level of service IRS was already
achieving at the time we testified. We suggested that Congress consider
withholding approval of this part of the STABLE initiative until IRS
provided a revised estimate of the level of telephone service it could
expect to achieve in fiscal year 2001. IRS provided a revised estimate as
part of the previously discussed staffing plan that the Appropriations
Committees approved in February 2001.

While generally supporting the STABLE initiative, we recognize, as we think
IRS does, that there are opportunities to improve the productivity of its
staff. For example, we noted in recent testimony on IRS? 2001 tax filing
season before the Subcommittee that taxpayer access to telephone assistors
is less than it could be because telephone assistor productivity- measured
by IRS as how quickly assistors complete telephone calls- has declined for
the third filing season in a row. 6 According to IRS officials, although
some of the decline can be explained by assistors answering more complex
calls, assistors clearly are not using their time efficiently.

IRS data also show that IRS staff are taking considerably more time, on
average, to complete audits or close collection cases. Although there may be
valid reasons for these increases (such as extra time spent to ensure a
higher quality audit or collection action), data we have seen raise issues
that we are currently analyzing at the Subcommittee?s request.

In its congressional justification and annual performance plan for fiscal
year 2002, IRS refers several times to improved efficiency. For example, IRS
talks about steps it has taken or will be taking to (1) centralize the
processing of most offers- in- compromise; (2) centralize the processing of
innocent spouse cases; and (3) establish risk- based compliance strategies
that, according to IRS, will help identify the most appropriate cases for
audit and collection action. Perhaps the most important driver of
productivity increases is the topic we will be discussing in the final
section of this letter- business systems modernization.

Several questions related to IRS staff productivity follow. Questions for
Oversight Staff productivity is a key to efficiently accomplishing IRS? many
tasks and to determining what staffing level IRS should have. Various data
indicate that opportunities exist for improved productivity among IRS staff.

 Does the Oversight Board believe that IRS is adequately managing staff to
achieve reasonable levels of productivity? If not, what more should IRS be
doing?

 What kind of data is IRS gathering to identify the causes of any
productivity declines. What has IRS done to assess the causes for
productivity declines among staff?

 What specific plans has IRS developed to increase staff productivity based
on data- driven analyses of productivity trends?

6 Internal Revenue Service: 2001 Tax Filing Season, Systems Modernization,
and Security of Electronic Filing (GAO- 01- 595T, Apr. 3, 2001).

GAO- 01- 698R IRS? FY 2002 Budget Page 8

Business Systems Modernization

In its fiscal year 2002 budget request, IRS is requesting about $397 million
for its Business Systems Modernization (BSM) program. The BSM program is
IRS? multiyear effort to put into place the technology that will support
revamped business processes. The program consists of a number of new system
acquisition projects that are at differing stages of acquisition and
implementation, as well as various program- level initiatives intended to
establish the capacity for IRS to effectively manage these projects. BSM is
vital to achieving IRS? new, customerfocused vision and enabling IRS to meet
performance and accountability goals. IRS plans to use the $397 million to
continue ongoing (1) projects to their next life cycle milestones and (2)
program- level initiatives through fiscal year 2002.

Since 1997, Congress has appropriated about $578 million for BSM and, in
doing so, stipulated that the funds were not to be obligated until IRS
submitted to Congress for approval an expenditure plan that meets certain
conditions, such as complying with Office of Management and Budget systems
investment guidelines. From mid- 1999 to September 2000, IRS submitted three
expenditure plans and two ?stopgap? funding measures to Congress and has
received approval to obligate about $450 million. In March 2001, IRS
submitted its fourth expenditure plan for the remaining $128 million to
carry BSM program- level initiatives through mid- November 2001 and ongoing
projects through to their next life cycle milestones. If approved, IRS will
have used all of its BSM funds. In anticipation of its fiscal year 2002
request being approved, IRS plans to submit another expenditure plan by
October 2001.

We have long held- and communicated to IRS- the importance of establishing
sound management controls to guide its systems acquisition projects. 7 In
general, the information technology management controls that IRS needs fall
into five interrelated and interdependent categories- investment management,
system life- cycle management, enterprise architecture management, software
acquisition management, and human capital management. We have reported on
the risks associated with IRS? approach of concurrently building systems
while developing and implementing these management controls and
capabilities. 8 We have also reported that the risks associated with
building systems without the requisite management controls and capabilities
are not as severe early in a project?s life cycle, when it is being planned
(project definition and preliminary design), but escalate as the project is
built (detailed design and development). 9

To its credit, IRS has made important progress in implementing needed
modernization management capacity and, in doing so, recently recognized and
announced its decision to slow ongoing and new projects until all controls
are fully addressed. Given that IRS expects to totally exhaust
congressionally- approved BSM funding by about November 2001, is seeking
additional money for fiscal year 2002 to begin or continue building systems,
and has been slow to fully implement the full array of controls necessary
for a modernization effort of this magnitude, this is a good time to ensure
that the overdue modernization management controls are emphasized as a BSM
priority.

7 Tax Systems Modernization: Management and Technical Weaknesses Must Be
Corrected if Modernization Is to Succeed (GAO/ AIMD- 95- 156, July 26,
1995). 8 For example, see Internal Revenue Service: Progress Continues But
Serious Management Challenges Remain (GAO- 01- 562T, Apr. 2, 2001).

9 See Tax Systems Modernization: Results of Review of IRS? Third Expenditure
Plan (GAO- 01- 227, Jan. 22, 2001).

GAO- 01- 698R IRS? FY 2002 Budget Page 9 The Oversight Board is requesting
$450 million for BSM in fiscal year 2002, a $53- million

increase over the administration?s request. The Board stated that the
additional $53 million is needed to fully carry out fiscal year 2002 BSM
initiatives. Since the Board submitted its budget request, IRS, as mentioned
earlier, has raised concerns about whether it has the capacity to
effectively manage the entire program as currently envisioned and has
decided to slow ongoing projects and delay the start of new ones.
Consequently, if Congress appropriates $450 million for BSM, there is a risk
that IRS may be unable to effectively manage the entire $450 million.
Mitigating this risk is the fact that all planned BSM spending has to be
submitted to Congress via an expenditure plan before BSM funds can be
obligated, providing a follow- on control mechanism to ensure that
appropriated funds are managed and spent in an effective manner.

Questions related to BSM follow. Questions for Oversight

 When will IRS have the modernization management capacity to effectively
manage the BSM program?

 In the interim, what assurance can IRS provide Congress that all funds
appropriated for system modernization will be managed and spent in an
effective manner?

- - - - As agreed with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report until May
8, 2001. At that time, we will send copies to Representative William J.
Coyne, Ranking Minority Member of the Subcommittee; Representative William
M. Thomas, Chairman, and Representative Charles B. Rangel, Ranking Minority
Member, Committee on Ways and Means; the Honorable Paul H. O?Neill,
Secretary of the Treasury; the Honorable Charles O. Rossotti, Commissioner
of Internal Revenue; and the Honorable Mitchell E. Daniels, Jr., Director,
Office of Management and Budget. We will also make copies available to
others upon request This letter will also be available on GAO?s home page at
http:// www. gao. gov.

This letter was prepared under the direction of David J. Attianese,
Assistant Director. Other major contributors were Robert Antonio, Robert
Arcenia, and Gary Mountjoy. If you have any questions about this letter,
contact me or Mr. Attianese on (202) 512- 9110.

Sincerely yours, James R. White Director, Tax Issues

GAO- 01- 698R IRS? FY 2002 Budget Page 10

Enclosure I Allocation of IRS? Fiscal Year 2002 Budget Request by
Organizational Unit

Effective October 1, 2001, IRS implemented a new organizational structure.
IRS? reorganization includes two elements: (1) an organizational structure
built around four taxpayer- focused operating divisions 10 and (2) a
management focus on IRS? primary interactions with taxpayers- pre- filing,
filing, and post- filing (compliance). Although IRS retained its five
appropriation accounts, it fundamentally redesigned its budget structure at
the subaccount level. For example, IRS has replaced functionally- oriented
budget activities, such as submission processing, telephone and
correspondence, examination, and collection, with budget activities that
align with IRS? new pre- filing, filing, and post- filing focus.

IRS? new budget structure goes a long way to resolve one of the major
problems we had with IRS? old structure. As we discussed in testimonies
before the Subcommittee on IRS? budget requests for fiscal years 1999 and
2000, IRS? old structure commingled resources for customer service and
enforcement, making it impossible to determine how many resources IRS was
devoting or expecting to devote to each of those important activities. 11
IRS? new structure does a much better job of distinguishing between
assistance, which is basically prefiling and filing, and enforcement, which
is basically post- filing.

IRS formatted its official budget request to be consistent with its new pre-
filing, filing, and post- filing (compliance) focus. However, IRS is also
able to report data by organizational unit. Tables 3 and 4 show how IRS has
allocated its fiscal year 2002 budget among its four main operating
divisions. In providing this information, IRS cautioned that its allocation
could change as warranted by unanticipated circumstances or the like.

10 The four operating divisions are (1) Wage and Investment (W& I), serving
individual taxpayers who have only wage and investment income; (2) Small
Business and Self- Employed (SB/ SE), serving fully or partially self-
employed individuals and small businesses; (3) Large and Mid- Size Business
(LMSB), serving businesses with assets over $5 million; and (4) Tax Exempt
and Government Entities (TE/ GE), serving pension plans, exempt
organizations, and governments. 11 Tax Administration: IRS? Fiscal Year 1999
Budget Request and Fiscal Year 1998 Filing Season (GAO/ TGGD/

AIMD- 98- 114, Mar. 31, 1998) and Tax Administration: IRS? 2000 Tax Filing
Season and Fiscal Year 2001 Budget Request (GAO/ T- GGD/ AIMD- 00- 133, Mar.
28, 2000).

GAO- 01- 698R IRS? FY 2002 Budget Page 11

Table 3: Allocation of Dollars in IRS? Fiscal Year 2002 Budget Request by
Organizational Unit

Dollars in thousands

Budget activity Total W& I SB/ SE LMSB TE/ GE Subtotal Other

Pre- filing Services 590,676 378,045 50,248 30,969 60,009 519,271 71,405
Filing and Account Services 1,531,801 996,938 516,477 6, 767 9,565 1,529,747
2,054 Compliance Services 3,442,725 245,694 1, 671,802 586,198 104,773 2,
608,467 834,258 Earned Income Tax Credit 146,000 73,691 31,072 0 0 104,763
41,237 General Management & Administration 642,626 16,146 57,254 15,123
19,919 108,442 534,184 Research and Statistics of Income 90,473 5, 579
14,361 5, 612 422 25,974 64,499 Shared Support Services 1,018,244 206 0 0 0
206 1,018,038 Information Services 1,523,389 4,640 2,262 2,288 436 9,626
1,513,763 Improvement Programs 39,860 0 0 0 0 0 39,860 Information
Technology 396,593 0 0 0 0 0 396,593

Total 9,422,387 1,720,939 2,343,476 646,957 195,124 4, 906,496 4,515,891

Source: IRS.

Table 4: Allocation of FTEs in IRS? Fiscal Year 2002 Budget Request by
Organizational Unit FTEs Budget activity Total W& I SB/ SE LMSB TE/ GE
Subtotal Other

Pre- filing Services 4,429 1,642 861 297 965 3,765 664 Filing and Account
Services 31,601 20,569 10,786 52 177 31,584 17 Compliance Services 46,174 4,
812 25,262 6, 084 1,116 37,274 8, 900 Earned Income Tax Credit 2, 236 1,044
703 0 0 1,747 489 General Management & Administration 3,800 207 606 139 119
1,071 2,729 Research and Statistics of Income 908 65 140 65 5 275 633 Shared
Support Services 4,626 0 0 0 0 0 4, 626 Information Services 7,578 33 10 36
5 84 7, 494 Improvement Programs 0 0 0 0 0 0 0 Information Technology 0 0 0
0 0 0 0

Total 101,352 28,372 38,368 6, 673 2,387 75,800 25,552

Source: IRS.

(440021)
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