Follow-up to the May 8, 2001, Hearing Regarding the IRS 	 
Restructuring Act's Goals and IRS Funding (29-JUN-01,		 
GAO-01-903R).							 
								 
This report provides information on (1) whether the goals of the 
Internal Revenue Service (IRS) Restructuring Act's goals are	 
realistic, and if not, whether the act should be changed and (2) 
the areas of disagreement between the IRS Oversight Board, the	 
Treasury Inspector General for Tax Administration (TIGTA), and	 
GAO regarding the act's funding issues. The IRS Restructuring	 
Act's goals of meeting taxpayers' needs while ensuring compliance
with the tax laws require a massive modernization of IRS. These  
changes present major management challenges and will require	 
considerable time to successfully implement. While IRS officials 
believe they have complied with the act's requirements, they are 
still learning how to effectively manage in the new environment. 
Therefore, GAO believes it is premature to consider significant  
changes to the act. On the matter of differences among the	 
Oversight Board, TIGTA, and GAO, there are some differences with 
respect to specific IRS funding issues. 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-903R					        
    ACCNO:   A01484						        
  TITLE:     Follow-up to the May 8, 2001, Hearing Regarding the IRS  
             Restructuring Act's Goals and IRS Funding                        
     DATE:   06/29/2001 
  SUBJECT:   Tax law						 
	     Tax administration 				 
	     Taxpayers						 
	     Federal agency reorganization			 
	     Appropriated funds 				 
	     IRS Business Systems Modernization 		 
	     Program						 
								 

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GAO-01-903R
     
GAO- 01- 903R Follow- up to May 8, 2001, Hearing United States General
Accounting Office

Washington, DC 20548

June 29, 2001 The Honorable William M. Thomas Chairman, Committee on Ways
and Means House of Representatives

The Honorable Charles E. Grassley Ranking Minority Member, Committee on
Finance United States Senate

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

Subject: Follow- up to the May 8, 2001, Hearing Regarding the IRS
Restructuring Act?s Goals and IRS Funding

The May 8, 2001, annual hearing convened by the Joint Committee on Taxation
to review the Internal Revenue Service (IRS) Restructuring and Reform Act of
1998 1 reemphasized the importance of the act?s goals. By passing the act,
Congress signaled strong concern that IRS had been overemphasizing revenue
production and compliance at the expense of fairness and consideration of
taxpayer interests. Accordingly, the act mandated that the IRS mission more
strongly emphasize serving the public and meeting taxpayers? needs.

In a letter following the hearing, you asked whether, 3 years into the act?s
implementation, its goals are realistic, and if not, whether the act should
be changed. You also asked us about areas of disagreement at the hearing
among the IRS Oversight Board, the Treasury Inspector General for Tax
Administration (TIGTA), and us. We are basing our response primarily on work
we did for the hearing, other recent testimony, and our discussions with
officials from the Oversight Board and TIGTA about the disagreements.

In summary, the IRS Restructuring Act?s goals of meeting taxpayers? needs
while ensuring compliance with the tax laws require a massive modernization
of IRS. These changes present major management challenges and will require
considerable time to successfully implement. While IRS officials believe
they have complied with the act?s requirements, they are still learning how
to effectively manage in the new environment. Therefore, we believe it is
premature to consider significant changes to the act. On the matter of
differences among the Oversight Board, TIGTA, and us, there are some
differences with respect to specific IRS funding issues.

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

Page 2 GAO- 01- 903R Follow- up to May 8, 2001, Hearing No Demonstrated Need
to Make Fundamental Changes to the Goals of the Act

The IRS Restructuring Act presents very significant management challenges to
IRS. The act?s overall goal of better balancing revenue production and
compliance with fairness and taxpayer service requires modernizing all
facets of IRS? operations, from business processes to performance management
and information systems. Similarly, the act?s requirements for revising
programs such as offer- in- compromise and innocent spouse, and changing
procedures such as enhancing taxpayer rights, are substantial changes that
continue to challenge IRS? capacity to manage change without disrupting its
core operations.

IRS has made both strategic and specific program changes in response to the
act. For instance, it has revised its mission statement and developed new
goals and objectives; implemented a new organization structure focused on
different types of taxpayers to better carry out its mission and goals; and
implemented new taxpayer rights and protections, such as enhanced due
process rules and expansions of the offer- in- compromise and innocent
spouse programs. IRS has also made important progress in implementing
systems modernization management controls and capabilities.

However, as we indicated in our May 8 testimony, IRS is struggling with the
management of many of these changes. The offer- in- compromise program has a
growing backlog of cases. IRS? performance in important areas of taxpayer
service, such as telephone assistance, is not at the level that IRS or
Congress expects. Enforcement trends continue to be troubling. Financial
information is not available to IRS managers on a timely basis for use in
day- to- day decisionmaking. Some systems modernization projects are passing
critical milestones without having certain essential management controls in
place and functioning.

Whether IRS can achieve the goals set by Congress in the IRS Restructuring
Act with current resources is an open question. The answer will depend, to
an important extent, on how well IRS can manage its resources. Currently,
IRS managers do not adequately understand the factors that affect
performance in many areas, and IRS is still developing its new performance
management system. Until IRS better develops these evaluation and
performance management capabilities, it will continue to struggle with
achieving the strategic goals of improving taxpayer service and compliance
and managing specific programs, such as offer- in- compromise and innocent
spouse. And until then, it is difficult to know enough about the efficiency
of IRS to make well- informed judgments about altering the act?s goals or
adjusting IRS resource levels.

As we said on May 8, performance evaluation-- the collection of data on
performance and the analysis of those 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 on a routine basis to support program
evaluations. Financial information, such as program and project cost data,
is one example. In other cases, analyses of past performance are not
complete enough to give managers an understanding of how to improve
performance. A case in point is the decline in the productivity of telephone
assistors: IRS has studied the time assistors spend handling a call, but not
other segments of assistors? time, including the time waiting to receive a
call.

IRS has continued to make progress in revamping its performance management
system, but a results- oriented approach is not yet routine at all levels.
IRS? new performance management system is most fully developed at the
agencywide level. However, as we discussed on May 8, the new 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 results- oriented performance management skills in
their day- to- day work by routinely

GAO- 01- 903R Follow- up to May 8, 2001, Hearing Page 3 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.
Congress will also be in a better position to monitor incremental IRS
progress in what necessarily will be a long- term effort.

Making a results- oriented performance management approach routine at all
levels of IRS requires a change in management culture. Key steps that remain
in this effort include developing a measure of voluntary compliance with the
tax laws; developing division- level and smaller unit performance goals that
are specific, measurable, and results- oriented; and revamping the
evaluation system for frontline employees- areas that we have reported on
and will continue to report on.

Given that IRS is still learning to better manage its resources to achieve
what will be a longterm transformation, we conclude that it would be
premature to make fundamental changes to the goals of the IRS Restructuring
Act. Similarly, based on our work to date, we have no recommendations for
less fundamental changes to the goals. However, we recognize that others,
including IRS, TIGTA, or the Oversight Board, may be able to justify some
adjustments to specific provisions of the act if they promote administrative
efficiency or further achieving the act?s goals. We also believe that IRS
must be held accountable for developing the stronger performance evaluation
and results- oriented performance management capabilities needed to better
manage its resources. To this end, continued congressional oversight of IRS?
efforts to modernize is key.

Some Disagreements Over Specific IRS Funding Issues

From discussions we have had with Oversight Board and TIGTA officials since
the May 8 hearing, we have concluded that there were some disagreements
among us over specific IRS funding issues discussed at the hearing.

One area of disagreement was over fiscal year 2002 funding for IRS business
systems modernization. The Oversight Board recommended that $450 million be
appropriated to the Business Systems Modernization (BSM) account in fiscal
year 2002--$ 53 million more than IRS sought or justified in its budget
submission. Moreover, after the budget submission, IRS decided to slow down
its projects so it would not exceed its capacity to effectively manage
modernization. Given these facts, in our view, appropriation of the
additional $53 million in fiscal year 2002 was not clearly justified.
Regardless, even if Congress does appropriate the additional $53 million,
IRS? past appropriation acts 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 effectively managed and spent.

A second area of disagreement was the need for a fiscal year 2002 budget
increase to cover inflationary increases in nonpay expenditures and certain
other costs. The Oversight Board recommended additional funding ($ 137
million, or about 1.5 percent of IRS? proposed budget) for these costs. The
proposed administration budget for IRS recognized unfunded costs, although
the dollar amount was lower ($ 57 million), but indicated they could be
covered through improved resource management. 2 The consequences of not
increasing IRS? budget to fund these costs are unclear. We said at the May 8
hearing that it would be difficult for us to support a budget increase for
these costs without some facts from IRS showing the consequences of not
getting the increase.

2 See Fiscal Year 2002 Budget Request for the Internal Revenue Service (GAO-
01- 698R, May 1, 2001).

Page 4 GAO- 01- 903R Follow- up to May 8, 2001, Hearing

An area where the Oversight Board recommended a budget increase for IRS, but
we took no position at the hearing, was the need for funding such
improvement projects as upgrading laptop computers. The Board recommended a
$137 million budget amount, $97 million more than the $40 million IRS
requested. We have not assessed the need for this funding and thus are
unable to describe the consequences if IRS were not to receive it.

During the hearing, the Oversight Board emphasized the importance of 2- year
funding for the BSM account. We have no disagreement with the Board on this
issue. We believe that, given the BSM control mechanism described earlier,
providing multiyear funding that has been justified could be an effective
way to provide funding stability and avoid unnecessary interruptions in
long- term information technology projects.

- - - - As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this letter until 30
days from the date on the letter. At that time, we will send copies to the
Ranking Minority Member, Committee on Ways and Means; the Chairman,
Committee on Finance; the Ranking Minority Member, Subcommittee on
Oversight, Committee on Ways and Means; the Secretary of the Treasury; the
Commissioner of Internal Revenue; the Chairman of the IRS Oversight Board;
and the Treasury Inspector General for Tax Administration. In addition, we
will make copies available to others on request. The letter will also be
available on our home page at http:// www. gao. gov.

Major contributors to this letter were Lawrence Korb and Gary Mountjoy. If
you have any questions, you may contact Michael Brostek or me on (202) 512-
9110.

Sincerely yours, James R. White Director, Tax Issues

(440061)
*** End of document. ***