IRS Modernization: Continued Improvement in Management Capability
Needed to Support Long-Term Transformation (08-MAY-01,		 
GAO-01-700T).							 
								 
This testimony discusses (1) how well the Internal Revenue	 
Service (IRS) is providing service to taxpayers and ensuring	 
compliance with tax laws, and (2) IRS' progress in its long-term 
effort to modernize. GAO found that IRS posted mixed results in  
2001 in collecting revenues, providing taxpayer service, and	 
enforcing tax laws. On the plus side, IRS processed millions of  
tax returns and issued refunds without significant problems,	 
taxpayers had an easier time getting through to telephone	 
assistors, and IRS said it made progress in correcting weaknesses
that threatened the security of electronically filed tax	 
information. On the down side, the quality of service provided to
taxpayers who visited taxpayer assistance centers, trends in	 
audit rates and enforcement programs, and productivity declines  
continue to be troubling. With respect to modernization, IRS is  
making incremental progress in overhauling its organization,	 
performance management system, business processes, and		 
information technology. IRS is also making important progress in 
implementing its new organizational structure, continuing to	 
develop a blueprint for modernizing its business processes and	 
information systems, and more fully defining its strategic	 
direction. However, progress has not met expectations. For	 
example, IRS is not where it should be in implementing management
controls over business systems modernization, which has 	 
contributed to project delays.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-700T					        
    ACCNO:   A00960						        
  TITLE:     IRS Modernization: Continued Improvement in Management   
             Capability Needed to Support Long-Term Transformation            
     DATE:   05/08/2001 
  SUBJECT:   Information resources management			 
	     Tax administration systems 			 
	     Customer service					 
	     Systems conversions				 
	     Reengineering (management) 			 

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GAO-01-700T
     
Testimony Before Congressional Committees

United States General Accounting Office

GAO For Release on Delivery Expected at 9: 00 a. m. Tuesday, May 8, 2001 IRS
MODERNIZATION

Continued Improvement in Management Capability Needed to Support LongTerm
Transformation

Statement of James R. White, Director Tax Issues

Randolph C. Hite, Director Information Technology Systems Issues

Steven J. Sebastian, Acting Director Financial Management Issues

GAO- 01- 700T

Page 1 GAO- 01- 700T

Mr. Chairman and Members of the Committees: We are pleased to be here today
as we approach the third anniversary of the Internal Revenue Service (IRS)
Restructuring and Reform Act of 1998, 1 which established Congress?
expectation that IRS modernize to better meet taxpayer needs. We will
discuss (1) how well IRS is providing service to taxpayers and ensuring
compliance with the tax laws, and (2) IRS? progress in its long- term effort
to modernize. We will also note some issues related to IRS? fiscal year 2002
budget request. Our emphasis will be on the developments over the past year
since your last modernization oversight hearing and potential oversight
issues for the future.

IRS modernization is a massive and multifaceted effort that will take at
least a decade to complete. Historically, IRS has not been able to provide
American taxpayers with the quality of service that Congress has demanded.
Our past reports chronicle IRS? deficiencies, including inefficient, paper-
driven processes; poor management; weak incentives for employees to provide
quality service; and antiquated information systems. Because of the breadth
and depth of these deficiencies, modernization encompasses changes to
virtually every aspect of IRS, from its organizational structure and
business processes to its technology and ways of measuring and managing the
performance of the agency and its 100,000 employees. Implemented together,
improvements in these areas are intended to provide improved service and
compliance. At stake is IRS? ability to perform its mission. While the
transformation is occurring, IRS is simultaneously challenged to deliver its
stay- in- business activities without interruption-- answering telephones,
processing returns, issuing refund checks, and enforcing tax laws.

Our statement, based primarily on our recent audit work, makes the following
points:

IRS posted mixed results this year in collecting revenues, providing
taxpayer service, and enforcing tax laws. On the plus side, during this
year?s filing season, IRS processed millions of tax returns and issued
refunds without significant problems, taxpayers had an easier time getting
through to telephone assistors, and IRS said it made progress in correcting
weaknesses that threatened the security of electronically filed tax
information. On the down side, the quality of service provided

1 P. L. 105- 206, July 22, 1998.

Page 2 GAO- 01- 700T

to taxpayers who visited taxpayer assistance centers, trends in audit rates
and enforcement programs, and productivity declines continue to be
troubling. We share concerns expressed in Congress and by tax practitioners
that the declines in audits and enforcement actions may increase incentives
for taxpayers either to not report or to underreport their tax obligations.

With respect to modernization, IRS is making incremental progress in
overhauling its organization, performance management system, business
processes, and information technology. Successful completion of these
efforts, each a management challenge unto itself, should give IRS a
foundation to dramatically improve service and compliance in the future. IRS
made important progress this year. It implemented its new organizational
structure, continued to develop a blueprint for modernizing its business
processes and information systems, and more fully defined its strategic
direction. However, progress has not met expectations. For instance, IRS is
not where it should be in implementing management controls over business
systems modernization, which has contributed to project delays. IRS? efforts
to develop a measure of voluntary compliance did not proceed at the pace IRS
anticipated, and absence of this measure continues to compromise the
effectiveness of the performance system as a whole. In an effort as complex
and risky as IRS? modernization, however, it is important to remember that,
while the timetable for change is important, cutting corners to achieve this
timetable is not prudent.

A performance management system that establishes goals, objectives, and
measures- a structure for guiding and evaluating the transformation of IRS-
is essential to meeting Congress? expectations for IRS. In addition, a
performance management system gives employees a blueprint of how to do their
jobs and incentives to support what IRS wants to accomplish as an agency.
While IRS has made progress creating the structure of its performance
management system, managers at the working levels of the organization are
not yet routinely using data to monitor and manage performance. In some
cases, relevant, accurate data, such as financial data, are not available or
are not available on a timely basis. In other cases, analyses of past
performance are not complete enough to give managers an understanding of how
to improve performance.

Page 3 GAO- 01- 700T

IRS posted mixed results over the past year in processing returns, providing
service to taxpayers, and enforcing tax laws. The returnprocessing and
refund- issuing aspects of the 2001 filing season appear to be winding down
smoothly, and officials said that they have corrected some internal control
weaknesses that we identified in the last filing season that threatened the
security of electronically filed tax data. IRS made some progress in
improving taxpayers? access to telephone customer service, but concerns
remain over the levels of access and the accuracy of information provided.
Declines since 1996 in individual audit rates, the use of key enforcement
authorities, and resolutions of tax delinquencies are troubling.

Our preliminary review of the 2001 filing season did not identify any
significant problems adversely affecting IRS? ability to process returns and
refunds. 2 This accomplishment is a proud testament to the dedication and
abilities of IRS employees who meet this critical responsibility despite
shortcomings in information systems and the challenge of working in a
rapidly changing organization. The successes in processing returns and
issuing refunds were achieved in a period in which the number of returns
filed continues to grow, as does the level of complexity in the returns. 3

Our review of IRS? electronic filing systems during the 2000 filing season
showed that IRS had ineffective controls to ensure the security of those
systems and electronically transmitted taxpayer data. We demonstrated that
individuals, both inside and outside of IRS, could gain unauthorized access
to IRS? electronic filing systems and view, modify, copy, or delete taxpayer
data. Although IRS said that it had not had evidence of any such intrusions,
IRS did not have adequate procedures to detect intrusions if they had
occurred. According to IRS officials, IRS moved promptly to correct the
access control weaknesses we identified before this year?s filing season.
IRS developed plans to improve security over its electronic filing systems
and internal networks and said that it had substantially implemented those
plans. We plan to test the effectiveness of IRS? actions later this year.
Sustaining effective computer controls in today?s dynamic

2 Internal Revenue Service: 2001 Tax Filing Season, Systems Modernization,
and Security of Electronic Filing (GAO- 01- 595T, Apr. 3, 2001). 3
Processing and issuing refunds is one issue; ensuring compliance is another.
IRS controls to ensure that refunds are valid are often not applied until
months after refunds are disbursed. IRS? Performance Was

Mixed Returns Processed and Refunds Issued Without Significant Problems

Page 4 GAO- 01- 700T

computing environment will require top management attention and support,
disciplined processes, and continuing vigilance.

The news on telephone customer service activities is better this year than
last, although IRS still has a long way to go to reach its goal of providing
assistance comparable to that provided by leading public and private
telephone customer service organizations. One indicator of IRS? performance
in assisting the millions of taxpayers who call with questions is ?level of
service?- a measure of the number of calls answered divided by the number of
calls attempted. As shown in figure 1, IRS answered a greater percentage of
calls during the first 11 weeks of this filing season than it did at the
same point in 1998, 1999 and 2000.

Figure 1: Toll- Free Telephone Level of Service for the First 11 Weeks of
Filing Seasons 1998 through 2001

Note: IRS? level of service figures measure the percentage of call attempts
that ultimately receive assistance- either from a customer service
representative or an automated response menu. The figures do not address how
long callers waited to receive assistance. The level of service computation
for 2001 is not completely comparable to the computation for the other years
because IRS is routing some refund inquiry calls this year to its Tele- Tax
line for automated responses. In an effort to provide as accurate a
comparison as possible to IRS? performance in past years, we adjusted the
level- of- service computation to include refund inquiries answered by the
automated Tele- Tax line, but Tele- Tax data does not account for taxpayers
who may have abandoned their calls before getting an answer.

Source: GAO?s analysis of IRS? data.

Despite Progress, Customer Service Lags Behind Goals

74 48

63 76

0 20

40 60

80 100

1998 1999 2000 2001

Cal endar year Service level

Page 5 GAO- 01- 700T

Despite these improvements in level of service, IRS officials recognize that
to achieve the goal of providing telephone assistance comparable to that
provided by leading public and private call center operations, IRS needs to
do more to improve access to telephone assistance. Almost one- quarter of
taxpayers? calls to IRS were not answered. Declines in the productivity of
telephone assistors and delays in modernizing call routing technology-
issues that we will discuss in detail in other sections of our statement-
have prevented even greater improvement.

Answering the telephone is only half of the battle. Assistors then have to
give taxpayers the right responses to their inquiries. For the 2000 filing
season, IRS estimated that it provided accurate answers to tax law questions
73 percent of the time and to account questions 59 percent of the time. The
Commissioner recently reported that this fiscal year, IRS provided accurate
answers to tax law questions 78 percent of the time and to account questions
88 percent of the time. However, IRS changed its method for measuring
accuracy this year, so accuracy rates cannot be compared to prior years.

In an attempt to improve service to taxpayers who visit walk- in sites, IRS
changed the structure and increased the staffing of its field assistance
program last year, but the quality of the service provided remains a
concern. IRS reviewers posing as taxpayers conducted 272 visits to taxpayer
assistance centers before the 2000 filing season and another 272 during the
filing season. Of the questions asked, 81 percent were not answered
correctly, and 21 percent of the reviewers were denied service. A similar
but smaller study done in January and February 2001 by the Treasury
Inspector General for Tax Administration found that reviewers received
inaccurate answers about 48 percent of the time.

Page 6 GAO- 01- 700T

Enforcement program trends continue to be troubling. IRS? audit rate for
individuals has steadily declined since 1996, and examinations have declined
across the full spectrum of taxpayers- from individual wage earners to
businesses large and small. Figure 2 shows the declines in individual audit
rates 4 and use of three key enforcement authorities: seizures, liens, and
levies. 5 Although the Commissioner had predicted last year that these
downward trends would reverse, by and large, they did not.

Figure 2: Declines in Individual Audit Rate and Use of Enforcement
Authorities, 1996 Through 2000

Source: GAO?s analysis of IRS? data.

4 The proportion of tax returns filed by individuals that IRS audits each
year. 5 Under the Internal Revenue Code, levy is defined as the seizure of a
taxpayer?s assets to satisfy a tax delinquency. IRS differentiates between
the levy of assets in the possession of the taxpayer (referred to as a
seizure) and the levy of assets such as bank accounts and wages that are the
possession of third parties such as banks and employers (referred to as a
levy). A lien is a legal claim that attaches to property to secure the
payment of a debt. The filing of a lien would prevent the taxpayer from
selling an asset, with clear title, without payment of the tax debt. Trends
in Enforcement

Programs Are Troubling

0.0 0.5

1.0 1.5

2.0 1996 1997 1998 1999 2000

Fiscal year Percentage of returns audited

0 3000

6000 9000

12000 1996 1997 1998 1999 2000

Fiscal year Seizures 0 200

400 600

800 1996 1997 1998 1999 2000

Fiscal year Liens (thousands)

0 1

2 3

4 1996 1997 1998 1999 2000

Fiscal year Levies (millions)

Liens Seizures Individual audit rate

Levies

Page 7 GAO- 01- 700T

Also troubling is that IRS? telephone and field collection components have
not kept pace with other IRS compliance programs such as audits that make
tax assessments when taxpayers do not fully report their tax liabilities.
Because of this, commencing in mid- 1999, these collection components began
closing delinquencies without working them- that is, without making
collection contact with taxpayers through either telephone calls or field
visits. This type of case closure is referred to as

?shelving.? As shown in figure 3, tax delinquencies shelved, together with
related interest and penalties, totaled almost $12 billion at the end of
March 2001. During our fiscal year 1999 and 2000 audits of IRS? financial
statements, 6 we found instances of unpaid tax cases in which IRS was not
actively pursuing collection despite evidence in IRS? files that the
accounts had some collection potential. Once closed, the only provisions for
reactivating shelved delinquencies for telephone and field collection action
are (1) if the taxpayers had additional delinquencies or if information
returns were filed identifying a previously unknown levy source and (2) if
IRS found the resources to work the collection cases.

Figure 3: Tax Delinquencies Shelved by IRS

a Includes related penalties and interest. Source: GAO?s analysis of IRS?
collection activity reports.

6 Financial Audit: IRS Fiscal Year 2000 Financial Statements (GAO- 01- 394,
Mar. 1, 2001) and Financial Audit: IRS Fiscal Year 1999 Financial Statements
(GAO/ AIMD- 00- 76, Feb. 29, 2000).

As of 9/ 30/ 99

As of 9/ 30/ 00

As of 3/ 31/ 01 As of

9/ 30/ 99 As of

9/ 30/ 00 As of

3/ 31/ 01 Amount of delinquencies (billions) a Number of delinquencies
(millions)

0.0 0.5

1.0 1.5

2.0 2.5

3.0 0 2

4 6

8 10

12

Shelved Tax Delinquencies

Page 8 GAO- 01- 700T

Declines in the number and productivity of enforcement staff contributed to
the declines in enforcement programs and the shelving of cases. For example,
from fiscal year 1996 to 2000, the number of IRS employees working
collection cases in the field dropped from about 5,500 to about 3,600, or by
about 35 percent. In part, this drop was due to attrition, and, in part, it
was due to reassignments intended to provide improved service to taxpayers.
IRS does not routinely measure the productivity of staff handling collection
cases, but IRS officials agree that it is taking longer for staff to work
cases. Our analysis of collection staff time spent on collection cases and
the number of cases closed over the period 1996 to 2000 indicates that the
amount of time spent to close a case, excluding the processing of offers in
compromise, has increased by about a third. 7 While there may be valid
reasons for the productivity decline, including additional statutory
requirements and extra time spent to ensure quality, IRS officials have not
been able to provide us with a data- based explanation of the factors that
have affected productivity or the extent to which the productivity decline
has contributed to the declines in enforcement programs.

We share concerns that have been expressed in Congress and by tax
practitioners that these declines in audits, enforcement actions, and
collections of delinquencies may increase incentives for taxpayers either to
not report or to underreport their tax obligations. Because IRS lacks a
measure of the extent to which taxpayers voluntarily comply with tax laws,
it does not know the impact of the recent declines in enforcement activities
and delinquency collections. Shelving of collection cases exacerbates our
concern regarding voluntary compliance because IRS is not following through
on cases in which taxpayers have been found to be noncompliant. (Further
details on the implications of the lack of a voluntary compliance measure
are discussed in the next section.)

IRS? inability to reduce growing backlogs in two other programs- innocent
spouse and offer- in- compromise- negatively affect both taxpayer service
and enforcement and will merit oversight in the year ahead. The innocent
spouse program allows relief under certain conditions to an innocent spouse
from tax liabilities solely attributable to the actions of the other spouse.
The offer- in- compromise program allows for contracts between IRS and
individual or business taxpayers to settle

7 Including offers in compromise, the average time to close a case has
increased by about 50 percent.

Page 9 GAO- 01- 700T

tax debts for less than the amount of the debts. Sizeable inventories of
claims and offers and slow processing times under these programs are
examples of poor service to taxpayers. IRS staff reassigned to reduce
program backlogs, thus far unsuccessfully, have taken resources away from
other collection activities.

Both the innocent spouse and offer- in- compromise programs were greatly
expanded as a result of provisions of the Restructuring Act. At the end of
fiscal year 2000, the inventory of innocent spouse cases being worked had
grown to almost 40, 000, but the influx of new cases appears to have
stabilized in the past 2 years. The inventory of unresolved offer-
incompromise cases was about 87, 500 at the end of fiscal year 2000, almost
triple the number of unresolved offers IRS had pending at the end of fiscal
year 1997. In addition, the timeliness of cases worked declined. The
percentage of offers IRS completed within 6 months was down from 64 percent
in 1997 to 38 percent in fiscal year 2000.

IRS? modernization, encompassing fundamental changes in organizational
structure, business processes, information systems, and performance
management, is a long- term effort to transform the agency into a more
reliable, accountable, customer- focused organization. Over the past year,
IRS has made important progress toward that end; however, work on certain
key aspects of business systems modernization and performance management was
slower than anticipated. In an effort as complex and risky as IRS?
modernization, however, it is important to remember that, while the
timetable for change is important, cutting corners to achieve this timetable
is not prudent. To IRS? credit, senior officials are making the difficult
decisions necessary to manage the modernization for the long term. Still,
managers at the working levels of the organization are not yet routinely
using a performance- based approach to their work. Such an approach, in
which managers at all levels consistently apply performance management
skills in their day- to- day work by routinely gathering and using data to
define goals and assess progress, will help IRS design improvements and
achieve the transformation Congress desires.

In October 2000, IRS largely completed its transition to the new
organizational structure. In a process that the Commissioner likened to
putting together a giant jigsaw puzzle with literally thousands of pieces,
IRS put the new organization in place without significant effect- positive
or negative- on its processing of millions of returns this filing season.
That the reorganization has not yet led to significant changes in filing
Modernization Is

Progressing, but Transformation Will Be a Long- Term Effort

IRS Successfully Shifted to Its New Organizational Structure

Page 10 GAO- 01- 700T

season or other activities is not unexpected. The reorganization provides a
focus on taxpayer segments that IRS expects will help it better understand
taxpayers? needs and identify changes to its systems and procedures for
meeting those needs. In the course of our work at IRS in the coming year, we
will be monitoring how IRS? new operating divisions focus their efforts to
address specific compliance and service problems associated with their
particular taxpayer segments.

Business systems modernization (BSM)- a multi- year program to revamp
business processes and put in place the supporting technology- is vital to
achieving IRS? new, customer- focused vision and enabling IRS to meet
performance and accountability goals. This multi- billion- dollar program
began a little over 2 years ago and as of March 2001, had received
congressional approval to obligate about $450 million. 8 BSM consists of a
number of new systems acquisition projects that are at differing stages of
acquisition and implementation, as well as various program- level
initiatives intended to establish the controls and capabilities for IRS to
effectively manage the projects.

We have long held- and communicated to IRS- the importance of establishing
sound management controls to guide its BSM projects. 9 In general, the
management controls and capabilities that IRS needs fall into five
interrelated and interdependent categories as shown in figure 3- investment
management, system life- cycle management, enterprise architecture
management, software acquisition management, and human capital management.

8 IRS requested and Congress established a multi- year systems modernization
account and funded it with about $578 million via IRS? fiscal years 1998,
1999, and 2001 appropriation acts. In addition to the $450 million provided
so far, Congress is currently considering a plan submitted by IRS to
obligate the remaining $128 million to, among other things, fund program-
level initiatives through mid- November 2001 and ongoing projects through
their next life- cycle milestones.

9 Tax Systems Modernization: Management and Technical Weaknesses Must Be
Corrected If Modernization Is to Succeed (GAO/ AIMD- 95- 156, July 26,
1995). Despite Important

Progress, IRS Has Yet to Fully Implement the Capabilities Needed to
Effectively Manage the Business System Modernization Program

Page 11 GAO- 01- 700T

Figure 3: Information Technology Management Control Areas

Source: GAO.

In addition, we have reported on the risks associated with IRS? approach of
concurrently building systems while developing and implementing these
controls and capabilities. 10 We have also reported that the risks
associated with building systems without the requisite management controls
and capabilities are not as severe early in projects? life cycles when they
are being planned (project definition and preliminary design), but escalate
as projects are built (detailed design and development). 11 In this latter
case, the risk of performance shortfalls and rework due to missing controls
increases, both in terms of probability and impact.

To its credit, IRS has made important progress in implementing modernization
management controls and capabilities. For example, IRS has (1) largely
defined and has begun implementing its system life- cycle methodology that
incorporates software acquisition and investment management processes, (2)
defined program roles and responsibilities of IRS and its modernization
contractors, (3) begun formally managing

10 For example, see Internal Revenue Service: Progress Continues But Serious
Management Challenges Remain (GAO- 01- 562T, Apr. 2, 2001). 11 See Tax
Systems Modernization: Results of Review of IRS? Third Expenditure Plan
(GAO- 01- 227, Jan. 22, 2001).

Investment Management

Life- Cycle Management

Enterprise Architecture Management

Program Management

Capability

Human Capital Management

Acquisition Management

Page 12 GAO- 01- 700T

modernization risks in an effort to proactively head off problems, and (4)
made progress toward completing its enterprise architecture. IRS has also
taken steps in response to our recommendations to strengthen the management
of individual BSM projects as well. In addition, IRS recently hired
experienced technical and managerial executives and augmented existing
modernization staff with experienced IRS information systems and acquisition
personnel.

We are concerned, however, because projects are proceeding past critical
milestones without certain essential management controls in place and
functioning. In particular, in our ongoing work for IRS? appropriations
subcommittees, we found that IRS is proceeding with building systems-
including detailed design and software development work- before it has
implemented key controls. For example, IRS has yet to develop a sufficiently
defined version of its enterprise architecture to effectively guide and
constrain acquisition of modernization projects. In addition, it has not yet
implemented rigorous, disciplined configuration management practices on key
projects. IRS also has not ensured that the projects are following mature
software acquisition processes. As we have concluded in our past reports,
attempting to acquire modernized systems before having the requisite
management controls increases the risk that systems will experience cost,
schedule, and performance shortfalls, and these risks increase as projects
move from planning into design and development.

Key IRS projects are now beginning to experience these shortfalls. For
example, IRS data shows that a critical infrastructure project (called the
Security and Technology Infrastructure Release) was 1.5 months late and $2
million over budget in completing its preliminary design phase in January
2001. However, these project shortfalls are understated because not all
preliminary design phase commitments were completed then, and, as of mid-
April 2001, IRS was still working to finalize 6 of 19 work products needed
to complete this phase-- meaning that the project is actually almost 5
months late.

We discussed these missing controls with the Commissioner and his BSM
executives; they recognize the need to address these control weaknesses and
have initiated steps to do so. IRS plans to fully implement many of these
controls by the end of June 2001. In addition, the Commissioner decided
recently to slow ongoing projects and new projects, giving priority to first
putting in place missing management capacity and then building systems. For
example, the Customer Account Data Engine (CADE) project is being delayed to
a yet- to- be- determined time to, among other things, ensure that its
design is sufficiently defined. In addition, the start dates for

Page 13 GAO- 01- 700T

several new projects planned to begin in April 2001 are being delayed. IRS
also plans to stagger these project starts, rather than initiate them all at
once, with the first to begin this month.

With respect to BSM funding, IRS expects to totally exhaust congressionally-
approved BSM funds by about November 2001 and is seeking approximately $397
million in its fiscal year 2002 budget to continue the program. Given that
it has been slow to completely 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. 12

IRS? Oversight Board is recommending $450 million for BSM in fiscal year
2002, a $53 million increase over IRS? budget 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
above, has decided to slow ongoing and new projects in order to avoid
exceeding its current capacity to effectively manage the program.
Consequently, while we recognize that IRS needs funding to continue the BSM
program, it is unclear whether IRS needs the additional $53 million in
fiscal year 2002. Nonetheless, in the event that Congress does appropriate
the $450 million, IRS? past appropriations acts and IRS? fiscal year 2002
budget request require such BSM spending to be submitted to Congress via an
expenditure plan before BSM funds can be obligated. This provides a follow-
on control mechanism to ensure that appropriated funds are managed and spent
in an effective manner.

Through modernization, Congress expects IRS to provide top- quality service
and, in doing so, to efficiently collect revenues for the Treasury. A
performance management system that establishes goals, objectives, and
measures- a structure for guiding and evaluating the transformation of IRS-
is essential to meeting these expectations. In addition, when this structure
successfully cascades down through the organization, a performance
management system gives employees a blueprint of how to do their jobs and
incentives to support what IRS wants to accomplish as an agency. IRS has
continued to make progress in revamping its

12 Congress limited IRS? ability to obligate funds until certain controls
were in place by establishing a multi- year capital account- the Information
Technology Investments Account- to fund IRS? systems modernization
initiatives. Effective Performance

Management Is an Essential Element of IRS? Transformation

Page 14 GAO- 01- 700T

performance management system and has most fully developed it at the
agencywide level. The system is less developed at the division level and is
weakest at the front- line, where interactions with taxpayers occur. In the
long run, if managers at all levels consistently apply performance
management skills in their day- to- day work by routinely gathering and
using data to define goals, assess progress, and design improvements, IRS
will be better able to achieve the transformation it and Congress desire.
IRS still has a long way to go in establishing this type of performancebased
management culture.

IRS made progress over the past year in defining its strategic direction.
For example, IRS

 published a strategic plan for fiscal years 2000 to 2005 that lays out
IRS? mission, strategic goals, and objectives; and

 implemented a strategic planning and budgeting process designed to
reconcile competing priorities and initiatives with the realities of
available resources.

However, IRS is still missing key measures of voluntary compliance. Because
these measures are vital to understanding the ultimate impact of IRS?
service and compliance programs, their absence from IRS? array of
organizational performance measures continues to compromise the
effectiveness of the performance system as a whole. In May 2000, the
Commissioner appointed a project director to oversee the development of
voluntary compliance measures, including filing, reporting, and payment
compliance. This planning was not completed as quickly as anticipated and
will probably not be finalized this fiscal year.

Clear strategic direction for IRS as a whole, while essential, is not
sufficient. For its performance management system to act as a blueprint for
employees throughout IRS, the elements of IRS? system must cascade down
through the organization. In keeping with this principle, IRS? performance
management plan calls for each operating division to have complementary
goals, objectives, and measures and for front- line managers to develop
plans identifying the actions they need to take to support operational
objectives. Progress in Defining IRS?

Strategic Direction Mixed Success at the Division and Employee Levels

Page 15 GAO- 01- 700T

IRS has had mixed success in the challenging task of implementing its
performance management system. 13 For example:

 While most division performance goals reflected IRS? agencywide goals and
priorities, none of the 72 supporting objectives was stated in terms that
were specific and measurable- that is, they did not include a time period, a
numeric target, or a means to measure the objective. Also, with a few
exceptions, the objectives did not include an expected result or program
impact.

 In fiscal year 2000, IRS began requiring managers to develop plans that
identify the actions they intend to take to meet their objectives. The
action items in the plans developed by front- line managers were consistent
with IRS? mission, but 91 percent of the items we reviewed were not
specific, measurable, or outcome- or output- oriented.

Increasing the specificity of objectives and action plans could increase
managerial accountability and create stronger incentives for front- line
employees to achieve IRS? goals.

Our work on IRS? management of its telephone customer service operations
illustrates how goals and objectives have not cascaded down through the
organization. In a recent review of IRS telephone assistance, 14 we found
that IRS does not have long- term goals for the level of service to be
provided to taxpayers or annual goals aimed at achieving the long- term goal
over time. Without them, IRS lacks meaningful targets for strategically
planning and managing call center performance and measuring improvement.

Revamping IRS? evaluation systems for managers and front- line employees is
another important means of establishing a clear link between individual
employees? work and IRS? mission and goals. In February 2000, IRS
implemented a realigned performance evaluation system for executives,
managers, and supervisors. IRS had expected to implement a similarly aligned
evaluation system for front- line employees last fall. However, negotiations
with stakeholders are taking longer than expected, and IRS is uncertain
about when the new evaluation system will be in place.

13 See IRS Modernization: IRS Should Enhance Its Performance Management
System (GAO- 01- 234, Feb. 23, 2001). 14 IRS Telephone Assistance:
Opportunities to Improve Human Capital Management (GAO- 01- 144, Jan. 30,
2001).

Page 16 GAO- 01- 700T

Performance evaluation- the collection of data on performance and the
analysis of that data to determine the factors that explain performance- is
a key part of performance management. IRS managers do not consistently
evaluate the performance of their programs to make decisions about how to
improve performance. In some cases, relevant, accurate data are not
available or are not available on a timely basis to support program
evaluations. In other cases, analyses of past performance are not complete
enough to give managers an understanding of how to improve performance.

Financial information is an example of management information that is not
available on a timely basis to IRS managers. IRS was able this year to use
data from its financial systems to produce, for the first time, financial
statements that received an unqualified opinion. 15 However, it did so
through the use of substantial, costly, and time- consuming processes that
provided data months after the fact for a single point in time. As a routine
matter, IRS? financial management systems do not produce information that is
current or accurate and that can be used to assist managers in dayto- day
decisionmaking. For example, IRS does not track the cost accounting
information needed to prepare cost- based performance information.
Consequently, managers do not have the basic information needed to prepare
reliable cost- benefit data for internal decisionmaking and for budget
justifications, which could lead to inappropriate management or budgetary
decisions.

IRS? analyses of the declines in productivity referred to earlier in this
statement are examples of incomplete program performance evaluations.
Taxpayer access to telephone assistors is less than it could be because
telephone assistor productivity has declined for the third filing season in
a row. IRS has done several studies of productivity, but only considered
time spent handling a taxpayer call. IRS did not study other segments of
assistors? time that would affect overall productivity, including time spent
waiting to receive a call, time spent away from the telephone, and time
assistors were not assigned to answer calls. Similarly, IRS officials could
not give us an empirically- based explanation for declines in enforcement
staff productivity. With more complete evaluations of the causes of
productivity changes, IRS managers would have a more informed basis for
making decisions about how to improve productivity and be more likely to
meet performance goals.

15 An unqualified, or clean, opinion means that financial statements are
fairly presented. Managers Not Routinely Using

Data to Monitor and Manage Performance

Page 17 GAO- 01- 700T

Understanding the factors that drive productivity changes at IRS is
important when evaluating IRS? budget. While the increase in IRS? workload
and the complexity of its work might justify additional resources, declines
in productivity raise questions about whether IRS is using existing
resources efficiently. However, IRS? evaluations of productivity are not
complete enough to use in making informed judgments about the extent to
which existing resources could be used more efficiently. As a consequence,
it was difficult to analyze IRS? budget request for additional staff (the
STABLE initiative 16 ). In a letter last week to the Chairman, Subcommittee
on Oversight, House Committee on Ways and Means, we said we were generally
supportive of IRS? request on the grounds that the initiative targeted areas
of need. 17 However, we also recognized that opportunities exist to improve
productivity in those areas.

As IRS moves forward with modernization, the capacity to conduct sound
performance evaluations will be one building block for success. Indeed, the
Commissioner has written about the need for research and analysis that will
help IRS decisonmakers find the best ways to improve performance against
strategic and operational measures. We recently reported that it must
address longstanding challenges to produce research results that meet the
needs of managers and decisionmakers. These include, for example, ensuring
that staff have the right mix of skills for the work and that research
focuses on managers? needs. IRS recently established a Research Council to
coordinate research activities, including standardized training, data needs,
and quality standards.

Modernization of IRS? organizational structure, business processes,
performance management system, and information technology is necessary if
IRS is to achieve its goals of improving service to taxpayers and compliance
with tax laws. While important progress has been made in laying the
foundation for a new IRS, parts of the modernization effort have gone slower
than expected. Clearly, this is disappointing. Unfortunately, it reflects
the continuing need to build management capability. The goal of improving
service to taxpayers quickly must be balanced with the need to prudently
manage a massive, long- term effort like IRS modernization. As

16 STABLE (Staffing Tax Administration for Balance and Equity) is designed
to boost staff levels in tax compliance and customer service programs. 17
Fiscal Year 2002 Budget Request for the Internal Revenue Service (GAO- 01-
698R, May 1, 2001). Conclusion

Page 18 GAO- 01- 700T

of today, IRS does not have all the program management capabilities it needs
to manage a very large systems acquisition program. Nor do IRS managers
routinely use results- oriented management tools such as clear goal- setting
and data- based evaluations of performance.

Mr. Chairman, that concludes our statement. We would be pleased to respond
to any questions that you or other members may have at this time.

(440030)
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