Internal Revenue Service: Assessment of Fiscal Year 2005 Budget  
Request and 2004 Filing Season Performance (30-MAR-04,		 
GAO-04-560T).							 
                                                                 
Effective tax administration requires a combination of quality	 
customer service to help those who want to comply, and effective 
enforcement measures against those who do not. For the last few  
years, we have been reporting on improvements in taxpayer service
and declines in enforcement. With respect to IRS's fiscal year	 
2005 budget request, the Subcommittee asked GAO to assess whether
(1) IRS will be able to allocate more resources to enforcement,  
and (2) Business Systems Modernization (BSM) and other technology
efforts will deliver cost savings and efficiencies in the	 
immediate future. For the 2004 filing season performance, GAO was
asked to assess IRS's performance in processing returns and	 
providing assistance to taxpayers.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-560T					        
    ACCNO:   A09606						        
  TITLE:     Internal Revenue Service: Assessment of Fiscal Year 2005 
Budget Request and 2004 Filing Season Performance		 
     DATE:   03/30/2004 
  SUBJECT:   Customer service					 
	     Strategic planning 				 
	     Tax administration 				 
	     Tax administration systems 			 
	     Tax evasion					 
	     Taxpayers						 
	     Information technology				 
	     Performance measures				 
	     Labor force					 
	     Budget requests					 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 

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GAO-04-560T

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Oversight, Committee on Ways and Means, House
of Representatives

For Release on Delivery

Expected at 3 p.m. EDT INTERNAL REVENUE

Tuesday, March 30, 2004

SERVICE

Assessment of Fiscal Year 2005 Budget Request and 2004 Filing Season Performance

Statement of James R. White
Director, Tax Issues

Robert F. Dacey
Director, Information Security Issues

GAO-04-560T

Highlights of GAO-04-560T, a testimony before the Subcommittee on
Oversight, Committee on Ways and Means, House of Representatives

Effective tax administration requires a combination of quality customer
service to help those who want to comply, and effective enforcement
measures against those who do not. For the last few years, we have been
reporting on improvements in taxpayer service and declines in enforcement.

With respect to IRS's fiscal year 2005 budget request, the Subcommittee
asked GAO to assess whether (1) IRS will be able to allocate more
resources to enforcement, and (2) Business Systems Modernization (BSM) and
other technology efforts will deliver cost savings and efficiencies in the
immediate future. For the 2004 filing season performance, GAO was asked to
assess IRS's performance in processing returns and providing assistance to
taxpayers.

GAO is not making any recommendations. However, GAO has recommendations
that are still outstanding related to (1) BSM management controls, which
have contributed, at least in part, to cost overruns and schedule
shortfalls, and (2) IRS's budget justification for its information systems
operations and maintenance support.

www.gao.gov/cgi-bin/getrpt?GAO-04-560T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim White (202) 512-9110 or
[email protected].

March 30, 2004

INTERNAL REVENUE SERVICE

Assessment of Fiscal Year 2005 Budget Request and 2004 Filing Season Performance

IRS is requesting $10.7 billion in fiscal year 2005, 4.8 percent over
2004. This includes $377.3 million, primarily for additional enforcement
staff, and $373 million for increased costs of maintaining current
operations-funded from three sources-the budget increase, program
reductions and internal savings. The request for more enforcement staff
follows similar requests in IRS's past five budgets. Despite budget
requests that were almost fully funded and despite realizing some savings
in prior years, the number of most skilled enforcement staff declined by
over 21 percent between 1998 and 2003 because of other priorities,
including unbudgeted expenses. This history, and the expectation of
unbudgeted costs in 2005, raise questions about whether IRS will be able
to increase enforcement staff as planned.

IRS's request also includes about $1.93 billion in information technology-
$285 million for BSM contractor costs and about $1.64 billion for
information systems. Most BSM projects have experienced cost overruns and
schedule delays postponing benefits expected under BSM. IRS reduced its
BSM budget request to focus on fewer projects and is implementing plans to
respond to known deficiencies. IRS has made progress in implementing
investment management best practices for developing and supporting its
information systems budget request. However, until IRS fully implements
the improvements, its ability to develop supportable budget requests for
information systems operations and maintenance will be limited.

IRS's reported 2004 filing season performance in key areas improved, with
the exception of the accuracy of tax law responses provided over the
telephones to taxpayers, which declined. Also, the number of taxpayers
seeking assistance at IRS's walk-in assistance sites declined as did the
number of tax returns prepared at those sites.

Skilled enforcement staff: revenue agents, revenue officers, and special
agents, fiscal years
1998-2003
Full-time equivalents

25,000

20,000

15,000

10,000

5,000

0

1998 1999 2000 2001 2002 2003

Fiscal year

Revenue agents Revenue officers Special agents Total RA, RO, SA

Source: IRS.

Mr. Chairman and Members of the Subcommittee:

We are pleased to participate in the Subcommittee's hearing on the
Internal Revenue Service's (IRS) fiscal year 2005 budget request and its
performance to date during the 2004 tax filing season.

Effective tax administration requires a combination of quality taxpayer
service to help those who want to comply, and effective enforcement
measures against those who do not. Although tax administrators continually
debate the proper balance between taxpayer service and enforcement, the
ultimate goal is to assure a high level of voluntary compliance.
Currently, about 98 percent of the money IRS collects is received
voluntarily-without any IRS enforcement action.

For the last few years, we have been reporting on trends in taxpayer
service and enforcement. During this period, IRS has noticeably improved
the quality of service to taxpayers. At the same time, there have been
declines in many of IRS's enforcement programs and in the numbers of the
most skilled enforcement staff. Many inside and outside IRS have become
concerned that the declines in enforcement efforts have reduced taxpayers'
incentive to voluntarily comply with the tax laws. While the actual impact
on voluntary compliance is unknown, because IRS does not have a reliable
current estimate of the overall compliance rate, the fear is that
taxpayers could lose confidence in IRS's ability to ensure that all
taxpayers pay what they should. If taxpayers ever lose confidence that
their friends, neighbors, and business competitors are paying their fair
share of taxes, then they could become less willing to pay themselves.

One key to improving taxpayer service and enforcement is IRS's Business
Systems Modernization (BSM) effort, now in its 6th year. If successful,
BSM is expected to allow IRS to better serve taxpayers and enforce the tax
laws without a major increase in staffing and other resources. However, we
continue to report that modernization is a high-risk area, the scope and
complexity of BSM is growing, and BSM projects are experiencing additional
costs and delays.

As you requested, our statement discusses both IRS's 2005 budget request
and its 2004 filing season performance to date. With respect to the
budget, we assessed the likelihood that (1) IRS will be able to allocate
more resources to enforcement, and (2) BSM and other technology efforts
will deliver cost savings and efficiencies in the immediate future. With
respect to the filing season, we assessed IRS's performance in processing
returns and providing assistance to taxpayers.

Our assessment of the budget request and BSM is based on a comparative
analysis of IRS's fiscal year 2002 through 2005 budget requests, funding,
and expenditures, supporting documentation, and interviews with IRS
officials. Our assessment of the filing season is based on a comparison of
IRS's performance this year to the previous two filing seasons, site
visits to an IRS processing center and walk-in sites, monitoring
processing status meetings, interviews with IRS and Treasury Inspector
General for Tax Administration (TIGTA) officials and other external
stakeholders, reviews of TIGTA and other external reports, and reviews of
IRS's Web site. We used historical budget and performance data including
filing season performance data from reports and budget requests used by
the IRS, Department of Treasury, and Office of Management and Budget
(OMB). Although we have not verified the accuracy of the most recent data,
in past reports we have assessed IRS's budget and performance data.1 As a
result, we considered the data to be sufficiently reliable for purposes of
this testimony. The budget and performance projections for fiscal years
2004 and 2005 are subject to change. Also, we did not independently
validate planned BSM projects' cost estimates or confirm, through system
and project management documentation, the validity of IRS-provided
information on the projects' content and progress. We performed our work
in Washington, D.C. and Atlanta, Ga. from December 2003 through March
2004, in accordance with generally accepted government auditing standards.

In summary, our assessment of IRS's 2005 budget request shows that:

o  	IRS is requesting $10.7 billion, an increase of $489.8 million over
fiscal year 2004. The 2005 budget proposes $377.3 million to fund new
initiatives, primarily increases in enforcement staff, and $373 million to
cover the increased costs, such as salary increases, of maintaining
current programs. IRS plans to fund the additional spending from three
sources-the budget increase, program reductions ($149.7 million) and
internal savings ($110.8 million). IRS has made increasing enforcement
staff a priority in its last five budget requests. However, despite
getting its requests almost fully funded and despite realizing some
savings-although not all that were projected-IRS did not achieve increases
in enforcement staff. Staffing in three key enforcement
occupations-revenue agents, revenue officers,

1 U.S. General Accounting Office, Tax Administration: IRS Needs to Further
Refine Its Tax Filing Season Performance Measures, GAO-03-143 (Washington,
D.C.: Nov. 22, 2002) and U.S. General Accounting Office, Financial Audit:
IRS's Fiscal Years 2003 and 2002 Financial Statements, GAO-04-126
(Washington, D.C.: Nov. 13, 2003)

and special agents-declined by over 21 percent between 1998 and 2003. IRS
funded other priorities such as unbudgeted expenses and improvements to
taxpayer service. This raises several questions and concerns. One is
whether IRS will be able to increase enforcement staff as planned in 2005.
Another is whether the declines in enforcement staff, and the resulting
declines in statistics related to IRS's enforcement programs, are eroding
taxpayers' incentive to voluntarily comply with the tax laws.

o  	Included in IRS's budget request is about $1.93 billion (including
7,385 staff years) in information technology resources. This includes (1)
$285 million for the agency's multiyear capital account that funds
contractor costs for the BSM program and (2) about $1.64 billion for
information systems, of which $1.55 billion is for operations and
maintenance. The BSM request has been developed consistent with federal
guidance on budget preparation. While BSM management controls have
improved, some weaknesses, such as cost and schedule estimating, still
remain. Most BSM projects have experienced cost overruns and schedule
delays that have postponed the delivery of benefits to taxpayers and IRS
operations. In an effort to better ensure that projects are delivered
within budget and on schedule, IRS has reduced its BSM budget request to
focus on a smaller modernization project portfolio and is implementing
action plans to respond to deficiencies noted in several recent
assessments of the BSM program. In addition, with respect to its
information systems budget request, IRS has made progress in implementing
investment management best practices for developing and supporting it.
However, until IRS fully implements planned process improvements, its
ability to develop supportable information systems operations and
maintenance budget requests will remain limited.

Our assessment of the 2004 filing season to date shows that:

o  	IRS's performance during the 2004 filing season has improved in most
areas compared to this time last year and the year before, based on the
data we reviewed on key filing season activities-paper and electronic
processing, telephone assistance, IRS's Web site and walk-in assistance.
In particular, access to IRS's telephone assistors has improved and Web
site usage has increased. However, the accuracy of responses to tax law
questions provided by telephone assistors declined the last two years.
Additionally, the number of taxpayers seeking assistance at IRS's walk-in
sites continued to decline and IRS is shifting work from its walk-in sites
to alternative means of providing assistance, such as its volunteer
organizations and its Web site. Although it cannot be quantified, the
improvements overall in the 2004 filing season performance appear to

  Enhancing Enforcement Is A Key Priority But Devoting More Resources To
  Enforcement May Be Difficult

represent a payoff from IRS's modernization and increased emphasis on
service since 1998.

The fiscal year 2005 budget is the fifth consecutive budget request where
IRS is proposing increased staffing for enforcement and the third where it
has identified internally-generated savings to help fund the increase. The
2005 budget proposes that, of the $377.3 million for new initiatives to be
paid for either through new funding and reinvested savings, $315.2 million
or 84 percent go to enforcement. In the past, IRS has not been able to
realize all the projected savings intended to help fund enforcement
staffing increases. In addition, other priorities, including unbudgeted
expenses and taxpayer service, have consumed budget increases and
internally-generated savings. This raises the question about IRS's ability
to increase enforcement staffing as planned in 2005.

IRS is Asking For Significantly More For Enforcement in 2005

IRS's fiscal year 2005 budget request is $10.7 billion, up $489.8 million
or 4.8 percent from the amount appropriated for fiscal year 2004. IRS's
request identifies a total of $750.3 million of new proposed spending-
$377.3 million for new initiatives, primarily enforcement, and $373
million to maintain current operations (such as salary increases included
in the budget). IRS plans to fund the additional spending from three
sources- budget increases, program reductions, and internal savings. IRS
is proposing to receive $489.8 million in budget increases, gain $149.7
million from program reductions, primarily from reducing the amount for
BSM, and save $110.8 million from process improvements. For context about
IRS's staff resources, we provide information about how IRS allocated
those resources in fiscal year 2003 to various functions including returns
processing, taxpayers service and enforcement in appendix I.

In its 2005 budget request, IRS makes increasing enforcement staffing its
priority. IRS identified its priority enforcement areas as:

o  promoters of tax schemes,

o  misuses of offshore transactions,

o  uses of corporate tax avoidance transactions,

o  underreporting of income by higher income taxpayers, and

o  failures to file and pay large amounts of employment taxes.

IRS is proposing to spend $377.3 million on new initiatives; $315.2
million, or 84 percent is slated for enforcement initiatives. The rest is
for infrastructure projects to, for example, consolidate paper processing
operations. The major enforcement initiatives include:

o  	$90.2 million and 874 Full Time Equivalents (FTEs) to target
noncompliance by small business and self-employed taxpayers by hiring
field examination and collection, automated collection and service
center-based compliance staff;

o  	$65 million and 260 FTEs for additional criminal investigation
resources to combat corporate fraud, increase tax enforcement, and enhance
criminal investigation capabilities by hiring additional criminal
investigators and special agents to focus on corporate financial fraud,
general tax enforcement, improve forensic electronic evidence capabilities
and increase special agent support staff;

o  	$36 million and 207 FTEs to combat corporate abusive tax shelters by
devoting more resources to reviewing offshore transactions;

o  	$15.5 million and 175 FTEs to increase individual taxpayer compliance
by focusing on the full spectrum of individual taxpayer noncompliance,
including nonfilers, nonpayers of tax owed, and more tax assessments on
underreported income; and

o  	$15.1 million and 144 FTEs to combat diversions of charitable assets
and stop abusive transactions in the tax-exempt area by focusing on
terrorism funding and civil fraud by charities, and targeting tax
avoidance strategies by charities.

IRS is proposing to spend $373 million to maintain current operations,
which would cover increased costs of continuing current operations. The
increased costs include $133 million for salary increases assumed in IRS's
budget. IRS's 2005 budget assumes a federal salary increase of 1.5
percent. If the actual federal salary increase is higher than 1.5 percent,
IRS will have to cover the unbudgeted portion of the increase.

For 2005, IRS has identified $110.8 million in savings to be generated
from process and system improvements. Key savings initiatives include:

o  	$34.0 million and 408 FTEs from a reorganization of the information
systems function that will consolidate three parallel organizations, and
reduce staff, to improve operations and support to IRS customers;

o  	$15.7 million and 220 FTEs from consolidating insolvency and
exam/collection field support from over 80 to 5 or fewer locations;

o  	$14.9 million and 167 FTEs from the termination of transition
employees who could not be placed when offices closed and jobs were
shifted when IRS reorganized into business units; and

o  $5.1 million and 130 FTEs due to more electronic filing.

In addition to the savings, IRS has identified $149.7 million in program
reductions to help fund its 2005 spending priorities. The reductions
include $102.7 million due to reductions in the scope of certain BSM

projects (discussed later in more detail) and $18 million in overhead
reductions.

Recent History Suggests Increasing Enforcement Staffing May Be Difficult

IRS's Recent Budget Requests Were Almost Fully Funded, and Some Savings
Were Achieved

In its last five budget requests, IRS has asked for more enforcement
staff, to be funded partly by budget increases and partly through internal
savings. Despite budget requests that were almost fully funded and despite
achieving some savings, the number of skilled enforcement staff actually
declined. The budget increases and savings were consumed by other
priorities including unbudgeted expenses.

Table 1 shows that IRS has received almost 98 percent or more of its
budget requests since fiscal year 2002.

Table 1: IRS's requested and approved budget for fiscal years 2002 through
2005 (in millions)

Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2005 2002 (Actual) 2003
(Actual) 2004 (Actual) (Requested)

Requested
budget $9,422 $9,916 $10,437 $10,674

Budget approved 9,437 9,835 10,185

Source: IRS data.

Table 2 shows that in 2003 IRS realized about 34 percent of its
anticipated budget savings and about 41 percent of its anticipated staff
savings. In 2004, IRS officials believe they did a better job in both
estimating and tracking the savings and estimate they will be able to
reinvest 77 percent of the anticipated budget savings and 53 percent of
the anticipated staff savings.2

2 Although IRS officials were able to produce more complete supporting
documentation on cost estimates and savings justifications than for fiscal
year 2004, we were unable to verify actual IRS claims on savings and
reinvestments. IRS's budget office generally accepts the savings and
reinvestment data claimed by various IRS operating divisions, and reduces
the budget allocation of the unit that identified the savings. If expected
savings do not materialize, the operating division must either find a way
to make up the savings elsewhere with new efficiencies, reduce expected
expenditures, or petition for additional resources from other parts of the
organization.

Table 2: IRS's reported actual and estimated savings and reinvestments for
fiscal year 2003 and 2004 (In millions)

Fiscal Year 2003 Fiscal Year 2004 Fiscal Year 2005 (est)

Dollars Staff Levels Dollars Staff Levels Dollars Staff Levels

Savingsa

                  Budgeted 157.8 2,287 166.5 2,145 110.8 1,442

Actual 53.4 944 113.0 1,120

Percentage of actual b 34% 41% 68% 53%

                                 Reinvestmentsa

Projected 157.8 1,830 166.5 649 110.8

Actual 47.4 239 99.5 259

Percentage of actual b 30% 13% 77% 53%

Source: GAO analysis of IRS data.

aIRS considers savings to be gained through process or systems
improvements and reinvestments to be those savings that were realized and
available for other purposes.

bIRS reported actuals for 2003 and end of year projections for 2004.

IRS should be commended for identifying saving and reinvestment
opportunities in its budget request. While IRS has been unable to achieve
its savings targets, we recognize that budget preparation begins about 18
months before the beginning of the fiscal year, making it difficult to
accurately predict future savings. IRS officials believe they are doing a
better job both estimating and tracking savings. Nevertheless, IRS's
history raises questions about its ability to achieve the 2005 savings
targets.

IRS Has Been Unable to Despite budget requests that were almost fully
funded, and despite Achieve Increases In realizing some savings, IRS has
been unable to achieve the enforcement Enforcement Staffing in Recent
staffing increases projected in its recent budgets.

Years As shown in figure 1, the number of revenue agents (those who audit

complex returns), revenue officers, (those who do field collection work),
and special agents (those who performed criminal investigations) has
decreased over 21 percent between 1998 and 2003.

Figure 1: Revenue agents, revenue officers, and special agents, fiscal
years 1998 - 2003

Full-time equivalents

25,000

20,000

15,000

10,000

5,000

0

1998 1999 2000 2001 2002 2003

Fiscal year

Revenue agents

Revenue officers

Special agents

Total RA, RO, SA

Source: IRS.

The Large-and Mid-size Business (LMSB) operating division, responsible for
combating abusive corporate tax shelters and assuring that large
businesses are in compliance with the tax laws, is an example of these
staffing trends. According to LMSB officials, at the beginning of fiscal
year 2002, they had 5,047 revenue agents on board. This was reduced to
4,431 at the beginning of fiscal year 2004-a 12 percent reduction-due to
attrition and the inability to hire.

The declines in enforcement staff have been associated with declines in
enforcement efforts. For example, audit rates are below the levels of the
mid-1990s, even after accounting for recent increases. Figure 2 shows the
trend in total audits of individual taxpayers since 1993. Total audits
includes both face-to-face audits and less complex correspondence audits.
IRS and GAO have reported3 that IRS has experienced steep declines in
audit rates since 1996, although the audit rate has slowly increased since
2000.

3 U.S. General Accounting Office, Tax Administration: IRS Should Continue
to Expand Reporting on Its Enforcement Efforts, GAO-03-378, (Washington,
D.C.: Jan. 31, 2003).

Figure 2: Audit rate individual income tax returns, fiscal year 1993 -
2003

Audit rate 1.80

1.60

1.40

1.20

1.00

.80

.60

.40

.20

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Fiscal years

Source: IRS.

The link between the decline in enforcement staff and the decline in
enforcement actions, such as audit rates, is complicated by other factors,
such as changes over time in the mix of complex and simple enforcement
actions. However, IRS officials have stated that the decline in
enforcement staff has restricted their enforcement efforts. For example,
LMSB officials stated that they hired about 200 fewer revenue agents than
planned in fiscal year 2003 and expect to hire about 95 fewer in fiscal
year 2004 because of budget constraints. They estimated that had this
hiring occurred as planned, LMSB could have examined an additional 505
returns and 1,877 returns in fiscal years 2003 and 2004 respectively. In
addition, the 2005 budget request attributes the decline in enforcement
actions to the decline in enforcement staff.

The impact of the recent declines in enforcement staffing and enforcement
actions on taxpayers' rate of voluntary compliance is not known. This
leaves open the question of whether these declines are eroding taxpayers'
incentives to voluntarily comply. As we have reported,4 the IRS's National
Research Program (NRP), which is developing new estimates of taxpayer
compliance, is underway. These estimates will be the first based on data
more recent than 1988, when IRS last measured voluntary compliance.

4 U.S. General Accounting Office, Tax Administration: IRS is Implementing
the National Research Program as Planned, GAO-03-614, (Washington, D.C.:
June 16, 2003).

Other IRS Priorities Have Consumed Recent Budget Increases and Savings

o   o   o

  IRS's Information Technology Budget Includes Funding For BSM and Information
  Systems

According to IRS officials the new estimates should be available in 2005.
Until the NRP estimates are available, IRS lacks current data on
compliance including changes in taxpayers' compliance rate.

NRP is important for several reasons beyond measuring compliance. It is
intended to help IRS better target its enforcement actions, such as
audits, on non-compliant taxpayers, and minimize audits of compliant
taxpayers. It could also help IRS better understand the impact of taxpayer
service on compliance.

Priorities other than enforcement, including unbudgeted expenses and
taxpayer service, have consumed IRS's budget increases and savings over
the last few years. Unbudgeted expenses include unfunded portions of the
annual pay increases, that can be substantial given IRS's large workforce,
and other costs, such as postage increases and higher-than-budgeted rent
increases. According to IRS officials, these unbudgeted expenses accounted
for

$154 million of IRS's budget in 2002; $311 million of IRS's budget in
2003; and $169 million of IRS's budget in 2004.

IRS officials also told us that they anticipate having to cover unbudgeted
expenses in 2005. As of March 2004, they were projecting unbudgeted salary
increases for fiscal year 2005 of at least $100 million. This projection
could change since the actual federal salary increase for 2005 has not
been finalized.

Another reason for the reduction in enforcement staff has been IRS's
emphasis on improving service to taxpayers. According to IRS officials,
much of this improvement has been at the expense of additional resources
for enforcement and has resulted in less hiring of new staff for
enforcement activities.

IRS is requesting about $1.93 billion (including 7,385 staff years) in
information technology (IT) resources for fiscal year 2005. This includes
(1) $285 million for the agency's multiyear capital account that funds
contractor costs for the Business Systems Modernization (BSM) program and
(2) about $1.64 billion for information systems, of which $1.55 billion
(including 7,137 staff years) are for operations and maintenance. BSM is
important for IRS's future because it has the potential for long-term
efficiency gains without major increases in staffing or other resources.

Fiscal Year 2005 BSM Request Developed Consistent with Federal Guidance

Consistent with the Clinger-Cohen Act of 19965 and the Government
Performance and Results Act of 1993,6 OMB guidance on budget preparation
and submission7 require that, before requesting multiyear funding for
capital asset acquisitions, agencies develop sufficient justification for
these investments. The guidance requires that agencies implement key IT
management practices, including an integrated IT architecture and a
process for managing information systems projects as investments. In
addition, agencies are to prepare business cases that reasonably
demonstrate how proposed investments support agency missions and
operations, and provide positive business value in terms of expected
costs, benefits, and risks.

Beginning in 1995, when IRS was involved in an earlier attempt to
modernize its tax processing systems, and continuing since then, we have
made recommendations8 that IRS implement fundamental modernization
management capabilities before acquiring new systems. We recommended,
among other things, that IRS (1) put in place an enterprise architecture9
(modernization blueprint) to guide and constrain its business system
investments, and (2) implement disciplined processes for investment
decision management and system development management.

5 This fiscal year 1997 Omnibus Consolidated Appropriations Act, Pub. L.
104-208, renamed both Division D (the Federal Acquisition Reform Act) and
E (the Information Technology Management Reform Act) of the 1996
Department of Defense Authorization Act, Pub. L. 104-106, as the Clinger
Cohen Act of 1996.

6 P.L. 103-62.

7 See, for example, Office of Management and Budget, Preparing,
Submitting, and Executing the Budget, Circular No. A-11 (Washington, D.C.:
July 25, 2003).

8 See U.S. General Accounting Office, Tax Systems Modernization:
Management and Technical Weaknesses Must Be Corrected If Modernization Is
to Succeed, GAO/AIMD-95-156 (Washington, D.C.: July 26, 1995); Tax
Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season, and
Fiscal 1998 Budget Request, GAO/T-GGD/AIMD97-66 (Washington, D.C.: March
18, 1997); Tax Systems Modernization: Blueprint is a Good Start But Not
Yet Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54
(Washington, D.C.: February 24, 1998); and Tax Administration: IRS' 2000
Tax Filing Season and Fiscal Year 2001 Budget Request,
GAO/T-GGD/AIMD-00-133 (Washington, D.C.: March 28, 2000).

9 An enterprise architecture provides an institutional "blueprint" for
defining how an organization operates today (baseline environment) in both
business and technological terms, and how it wants to operate in the
future (target environment). It also includes a sequencing plan that
provides a road map for transitioning between these environments.

In response to our recommendations, IRS developed and is using an
enterprise architecture, which describes IRS's current and target business
and technology environments, and the associated high-level transition
strategy that identifies and conceptually justifies needed investments to
guide the agency's transition over many years from its current to its
target architectural state. In addition, IRS also implemented a capital
planning and investment control process for developing business cases and
managing BSM projects as part of an investment portfolio, as well as a
systems life cycle management methodology, which IRS refers to as the
enterprise life cycle.

IRS's $285 million request for the BSM account for fiscal year 2005 is
based on its enterprise architecture as well as its related investment
management process and life cycle management methodology. IRS's BSM budget
request constitutes a reduction of greater than 25 percent from the
planned fiscal year 2004 spending level of $388 million, and reflects the
agency's decision, in light of ongoing project delays, to focus on a
smaller modernization project portfolio in an effort to better ensure cost
targets are maintained, project schedules are met, and the promised
projects are delivered.

BSM Management Controls Improved, But Weaknesses Remain

Pursuant to statute,10 funds from the BSM account are not available for
obligation until IRS submits to the congressional appropriations
committees for approval an expenditure plan that meets certain
conditions.11 In January 2004, IRS submitted an expenditure plan seeking
approval to obligate funds from the BSM account for its planned fiscal
year 2004 projects and program-level initiatives. IRS's fiscal year 2004
plan reported the deployment of modernization projects during fiscal year
2003 that have benefited taxpayers and the agency, including an
application that provides refund status for the advanced child tax credit
and the first release of a new human resources system, HR Connect, which
has now been delivered to 73,000 IRS employees.

10 P.L. 108-199, Div. F, Title II, Jan. 23, 2004.

11 IRS's BSM expenditure plans are required to (1) meet the capital
planning and investment control review requirements established by OMB,
(2) comply with IRS's enterprise architecture, (3) conform with IRS's
enterprise life cycle methodology, (4) be approved by IRS, Treasury, and
OMB, (5) be reviewed by GAO, and (6) comply with federal acquisition
rules, requirements, guidelines, and systems acquisition management
practices.

In our briefing to the staff of the relevant appropriations subcommittees
on the results of our review of the fiscal year 2004 expenditure plan, we
reported that IRS has made progress in implementing our prior
recommendations to improve its modernization management controls and
capabilities. However, certain of these controls and capabilities related
to configuration management, human capital management, cost and schedule
estimating, and contract management have not yet been fully implemented or
institutionalized. Our analysis has shown that weaknesses in these
controls and capabilities have contributed, at least in part, to cost and
schedule shortfalls experienced by most BSM projects. In the absence of
appropriate management controls, systems modernization projects will
likely be hampered by additional costs and schedule shortfalls. The
reasons are twofold: the tasks associated with those projects that are
moving beyond design and into development are, by their nature, more
complex and risky. Also, the fiscal year 2004 expenditure plan supports
progress toward the later, more complex phases of key projects as well as
continued development of other projects.

BSM Projects Continue to Incur Cost Increases and Schedule Delays

Based on IRS's expenditure plans, BSM projects have consistently cost more
and taken longer to complete than originally estimated. In its fiscal year
2004 plan, IRS disclosed that key BSM projects have continued to
experience cost and schedule shortfalls against prior commitments. Table 4
shows the life cycle variance in cost and schedule estimates for completed
and ongoing BSM projects. These variances are based on a comparison of
IRS's initial and revised cost and schedule estimates to complete initial
operation12 or full deployment13 of the projects. We did not independently
validate planned projects' cost estimates or confirm, through system and
project management documentation, the validity of IRS-provided information
on the projects' content and progress.

12Initial operation refers to the point at which a project is authorized
to begin enterprisewide deployment.

13Full deployment refers to the point at which enterprisewide deployment
has been completed and a project is transitioned to operations and
support.

Table 4: IRS BSM project life cycle cost/schedule variance and benefits
summary for completed and on-going projects

Reported/revised Schedule Reported/revised Cost variance estimated cost
variance estimated Reported IRS/taxpayer Project (in thousands) (in
thousands) (in months) completion date benefits

                      Completed Projects Ongoing Projectsa

Security and Technology  +$7,553 $41,287 +5               1/31/02 Provides 
                                                           infrastructure for 
Infrastructure Release 1                      (initial operation) secure   
                                                       telephony and          
                                                 electronic interaction among 
                                                           IRS employees, tax 
                                                practitioners, and taxpayers. 

Customer Communications +5,310 46,420 +9                  2/26/02 Improves 
                                                           telecommunications 
            2001                            (full deployment) infrastructure, 
                                                        including             
                                                   telephone call management, 
                                             call routing, and customer self- 
                                                  service applications.       

Customer Relationship -1,938 7,375 +3 9/30/02 Provides commercial-off-the- 
      Management Exam                     (full deployment) shelf software to 
                                                                  IRS revenue 
                                                      agents to allow them to 
                                                   accurately compute complex 
                                                      corporate transactions. 

Human Resources Connect +200 10,200 0     12/31/02 Allows IRS employees to 
          Release 1                         (initial operation) access and    
                                                     manage their             
                                                  human resources information 
                                                       online.                

Internet Refund/ Fact +12,923 26,432 +14   9/26/03 Provides instant refund 
            of                                                         status 
          Filing                            (full deployment) information and 
                                                             instructions for 
                                                 resolving refund problems to 
                                                      taxpayers with Internet 
                                                         access.              

Modernized +17,057 46,303 +4.5 3/31/04b Provides a single standard for
e-File Release 1 (initial operation) filing electronic tax returns.

e-Services +86,236 130,281 +18           4/30/05 Provides a Web portal and 
                                  (full deployment) other e-Services to       
                                  promote                                     
                                                  the goal of conducting most 
                                                        IRS transactions with 
                                              taxpayers and tax practitioners 
                                                electronically.               

Customer Account Data  +36,760 97,905 +30c      6/30/05c Provides the      
                                                        modernized            
    Engine - Individual                         (full deployment) database    
           Master                                      foundation to          
       File Release 1                         eventually replace the existing 
                                                       individual master file 
                                                          processing systems. 
                                                    Facilitates faster refund 
                                                   processing and more timely 
                                               response to taxpayer inquiries 
                                                      for Form 1040EZ filers. 

Reported/revised Schedule Reported/revised Cost variance estimated cost
variance estimated Reported IRS/taxpayer Project (in thousands) (in
thousands) (in months) completion date benefits

Integrated Financial +53,916 153,786 TBDc   TBDc Provides a single general 
          System                             
        Release 1                              (full deployment) ledger for   
                                                      custodial and           
                                             financial data and a platform to 
                                                integrate core financial data 
                                                with budget, performance, and 
                                                        cost accounting data. 

Custodial Accounting +72,058 119,219 TBDc     TBDc Provides integrated tax 
    Project Release 1                        (full deployment) operations and 
                                                         internal             
                                                    management information to 
                                                    support evolving decision 
                                                       analytics, performance 
                                                             measurement, and 
                                                       management information 
                                                          needs.              

Source: GAO analysis of data contained in IRS's BSM expenditure plans.

a

Projects ongoing as of 9/30/03.

b IRS subsequently reported that Modernized e-File began initial operation
on 2/23/04.

c

Project schedules for the Customer Account Data Engine, the Integrated
Financial System, and the Custodial Accounting Project are currently under
review.

As the table indicates, the cost and schedule estimates for full
deployment of the e-Services project have increased by just over $86
million and 18 months, respectively, which included a significant
expansion from the initial project scope. In addition, the estimated cost
for the full deployment of Customer Account Data Engine (CADE) Release 1
has increased by almost $37 million, and project completion has been
delayed by 30 months. In addition to the modernization management control
shortcomings discussed above, our work has shown that the increases and
delays were caused, in part, by

o  	inadequate definitions of systems requirements. As a result,
additional requirements have been incorporated into ongoing projects.

o  	increases in project scope. For example, the e-Services project has
changed significantly since the original design. The scope was broadened
by IRS to provide additional benefits to internal and external customers.

o  	underestimating project complexity. This factor has contributed
directly to the significant delays in the CADE release 1 schedule.

o  	competing demands of projects for test facilities. Testing
infrastructure capacity is insufficient to accommodate multiple projects
when testing

schedules overlap.

o  	project interdependencies. Delays with one project have had a
cascading effect and have caused delays in related projects.

These cost overruns and schedule delays impair IRS's ability to make
appropriate decisions about investing in new projects, delay delivery of
benefits to taxpayers, and postpone resolution of material weaknesses
affecting other program areas.

Producing reliable estimates of expected costs and schedules is essential
to determining a project's cost-effectiveness. In addition, it is critical
for budgeting, management, and oversight. Without this information, the
likelihood of poor investment decisions is increased.

Schedule slippages delay the provision of modernized systems' direct
benefits to the public. For example, as table 4 shows, slippages in CADE
will delay IRS's ability to provide faster refunds and respond to taxpayer
inquiries on a timely basis.

Delays in the delivery of modernized systems also affect the remediation
of material internal management weaknesses. For example, the Custodial
Accounting Project is intended to address a material weakness in IRS's
financial reporting process and provide a mechanism for tracking and
summarizing individual taxpayer transactions. This release has yet to be
implemented, and a revised schedule has not yet been determined. In
addition, the Integrated Financial System is intended to address financial
management reporting weaknesses. When IRS submitted its fiscal year 2003
BSM expenditure plan, Release 1 of the Integrated Financial System was
scheduled for delivery on October 1, 2003. However, it has yet to be
implemented, and additional cost increases are expected.

IRS Is Acting to Resolve Issues Identified in Recent BSM Assessments

Given the continued cost overruns and schedule delays experienced by these
BSM projects, IRS and the prime systems integration support (PRIME)
contractor, Computer Sciences Corporation (CSC), initiated and recently
completed several in-depth and more comprehensive assessments of BSM.
These assessments revealed several significant weaknesses that have driven
project cost overruns and schedule delays and also provided a number of
recommendations for IRS and CSC to address the identified weaknesses and
reduce the risk to BSM. The deficiencies identified are consistent with
our prior findings. IRS developed a BSM action plan to address the
findings and recommendations resulting from these

assessments. IRS expects to complete implementation of its actions by the
end of the calendar year. Because of the significant risks associated with
the findings of these various assessments, continued monitoring by IRS and
validation of the effectiveness of corrective actions is critical to
reducing the likelihood of additional cost overruns and schedule delays.

It will be important for IRS to continue its efforts to balance the scope
and pace of the program with the agency's capacity to handle the workload,
and to institutionalize the management processes and controls necessary to
resolve the deficiencies identified by our reviews and the recent program
assessments. Meeting these challenges and improving performance are
essential if IRS and the PRIME contractor are to successfully deliver the
BSM program.

Continued Efforts Needed to Strengthen Information Systems Budget Request
Development Process

The Paperwork Reduction Act (PRA)14 requires federal agencies to be
accountable for their IT investments and responsible for maximizing the
value and managing the risks of their major information systems
initiatives. The Clinger-Cohen Act of 199615 establishes a more definitive
framework for implementing the PRA's requirements for IT investment
management. It requires federal agencies to focus more on the results they
have achieved and introduces more rigor and structure into how agencies
are to select and manage IT projects.

Leading private-and public-sector organizations have taken a project- or
system-centric approach to managing not only new investments but also
operations and maintenance of existing systems. As such, these
organizations

o  	identify operations and maintenance projects and systems for inclusion
in budget requests;

o  	assess these projects or systems on the basis of expected costs,
benefits and risks to the organization;

o  analyze these projects as a portfolio of competing funding options; and

o  use this information to develop and support budget requests.

14 44 U.S.C. S: 3506(h). 15 P.L. 104-106.

This focus on projects, their outcomes, and risks as the basic elements of
analysis and decision-making is incorporated in the IT investment
management approach that is recommended by OMB and GAO.16 By using these
proven investment management approaches for budget formulation, agencies
have a systematic method, on the basis of risk and return on investment,
to justify what are typically very substantial information systems
operations and maintenance budget requests.

In our assessment of IRS's fiscal year 2003 budget request, we reported
that the agency did not develop its information systems operations and
maintenance request in accordance with the investment management approach
used by leading organizations. We recommended that IRS prepare its future
budget requests in accordance with these best practices.17 To address our
recommendation, IRS agreed to take the following actions:

o  	develop an activity-based cost model to plan, project, and report
costs for business tasks/activities funded by the information systems
budget;

o  	develop a capital planning guide to implement processes for capital
planning and investment control, budget formulation and execution,
business case development, and project prioritization; and

o  	implement a process for managing all information systems investments
as a portfolio, patterned after the BSM program.

IRS has made progress in implementing investment management best practices
in developing and supporting its information systems budget request. IRS
officials reported that the agency is managing all information systems
funding requirements as a portfolio within Treasury's IT investment
portfolio system, and preparing business cases for many of its operational
program activities, as required by OMB. According to IRS, these business
cases are updated on a periodic basis and are evaluated within the context
of the agency's overall IT funding portfolio. IRS plans to

16 See, for example, U.S. General Accounting Office, Information
Technology Investment Management: A Framework for Assessing and Improving
Process Maturity, GAO-04-394G (Washington, D.C.: March 2004, Version 1.1).

17 U.S. General Accounting Office, Internal Revenue Service: Assessment of
Budget Request for Fiscal Year 2003 and Interim Results of 2002 Tax Filing
Season, GAO-02-580T (Washington, D.C.: Apr. 9, 2002) and Internal Revenue
Service: Improving Adequacy of Information Systems Budget Justification,
GAO-02-704 (Washington, D.C.: June 28, 2002).

align this portfolio management process with the capital planning and
investment control system now being implemented to provide a uniform
process to select, manage, and control all IT investments, including
modernization, enhancements, and sustaining operations.

Although progress has been made, IRS has not yet completed all of its
planned actions to implement our prior recommendation. Completion of IRS's
capital planning and investment control guide has been delayed due to
changing roles and responsibilities within the Modernization and
Information Technology Services organization, and thus was not used in
preparing the fiscal year 2005 information systems budget request.
According to IRS, the capital planning guidance will not be completed
until September 2004. In addition, as of March 2004, IRS has not yet
developed an activity-based cost accounting system to enable it to account
for the full cost of operations and maintenance projects and determine how
effectively IRS projects are achieving program goals and mission needs.
This cost model, which is being developed in conjunction with the
Integrated Financial System modernization project, has been delayed, and
due to Integrated Financial System schedule delays, will not be available
until the fiscal year 2008 budget formulation cycle. Until IRS implements
the capital planning and investment control guidance and the
activity-based cost model and incorporates them into the preparation of
its information systems budget request, the agency will not be able to
ensure that the information systems operations and maintenance request is
adequately supported.

IRS's filing season performance through mid-March has improved in most
areas compared to recent years, based on data we reviewed on five key
filing season activities-paper and electronic processing, telephone
assistance, IRS's Web site, and walk-in assistance. However, the accuracy
of tax law answers provided by IRS telephone staff declined. Although we
cannot quantify the connection between these improvements and IRS's
actions, they appear to represent a payoff from IRS's modernization and an
increased emphasis on service since the IRS Restructuring and Reform Act
of 1998.18

  Interim Results Of IRS's 2004 Filing Season Show Improvement Except In
  Telephone Accuracy

18 P.L. 105-206.

Table 5 summarizes IRS's filing season performance so far this year
compared to recent years. The following sections will address IRS's
specific performance in key areas.

  Table 5: IRS performance in the first weeks of the 2002 through 2004 filing
                                    seasons

         Volume in thousands 2002 2003 2004 Actual returns processed a

                           Paper 24,491 22,117 20,232

                        Electronic 35,067 38,627 42,988

                              Telephone assistance

                                        Total calls b  34,489 27,905   29,058 
                                Answered by assistors   9,208   9,434  10,116 
                               Answered by automation  25,281 18,471   18,942 
        Customer service representative level of          62%     82%     84% 
        service                                                       
           cAccounts customer accuracy rate estimates 88% +/- 88% +/- 89% +/- 

                                    1% 1% 1%

                                       c

Tax law customer accuracy rate estimates 84% +/-81% +/-76% +/-1% 1% 1%

                              Internet assistance

          Forms and publications downloaded d 158,000 195,000 205,000

e

                    Refund status inquiries N/A 9,300 14,300

f

                    Child Tax Credit inquiries N/A N/A 8,500

                               Walk-in assistance

                    Total Walk-in Contacts g N/A 2,740 2,433

                                       h

               Returns prepared at IRS walk-in sites 436 291 186

Returns prepared at volunteer sites j 466 594 737

Source: IRS Data.

a

From January 1 to March 22, 2002, January 1 to March 21, 2003, and January
1 to March 19, 2004.

b Total calls, calls answered by assistors and automation, and CSR level
of service are based on actual counts from January 1 to March 16, 2002,
January 1 to March 15, 2003, and January 1 to March 13, 2004. 2002 totals
include increased call demand as a result of the Economic Growth and Tax
Relief and Reconciliation Act of 2001 (P.L.107-16). Employer
Identification Number data has been added to 2002 and 2003 to ensure valid
data comparisons can be made to 2004 which includes Employer
Identification Numbers.

c

Based on a representative sample estimated at the 90 percent confidence
level from January to February 2002, 2003 and 2004.

d From January 1 to February 28, 2002, January 1 to February 28, 2003, and
January 1 to February 29, 2004.

e

From January 1 to March 20, 2003, and January 1 to March 20, 2004.

f From January 1 to March 21, 2004.

g From January 1 to March 15, 2003, and January 1 to March 13, 2004. h
From January 1 to March 16, 2002, January 1 to March 15, 2003, and January
1 to March 13, 2004. i From January 1 to March 9, 2002, January 1 to March
8, 2003, and January 1 to March 6, 2004.

IRS's Processing Operations Have Gone Smoothly, and Electronic Filing
Continues to Grow, But Not at Rate to Meet 2007 Goal

According to IRS officials, tax industry representatives and data
reviewed, the 2004 filing season is progressing smoothly (meaning without
disruptions in IRS computer systems used in processing that would have a
negative impact on taxpayers) and IRS is either meeting or exceeding its
goals for the number of days to process an individual income tax returns,
depending on the type of return. As table 5 shows, through March 19, 2004,
IRS has processed about 63 million individual tax returns-of which 43
million were received electronically, which is about 4.4 million more
electronically filed returns than this time last year. IRS officials have
attributed this year's performance, in part, to having planned
appropriately for issues such as correcting errors related to the advanced
child tax credit. Through March 12, 2004, IRS had identified about 2.7
million individual tax returns with errors, with approximately 1.6 million
related

                                       19

to the advanced child tax credit.

Electronic filing has grown from the same time last year. It has also
grown by about 250 percent overall-from about 15 million returns in 1996
to about 53 million in 2003. Although electronic filing continues to grow,
IRS is not on track to reach the long-term electronic filing goal of 80
percent by 2007 set by Congress in the IRS Restructuring and Reform Act of
1998.20 IRS officials recognize that they will not achieve the goal of
having 80 percent of all individual income tax returns filed
electronically by 2007. However, IRS officials told us they will continue
to strive to achieve that goal in the future. Moreover, as we reported
last year21, the growth rate from 1996 through 2003 has been generally
decreasing, with the 13 percent growth rate in 2003 representing the
smallest percentage increase in the

19 In 2003, the IRS, through Financial Management Service, issued advanced
child tax credit payments to more than 25 million taxpayers in a manner
similar to the 86 million advance refund checks issued in 2001. See U.S.
General Accounting Office, Tax Administration: IRS Issued Advance Child
Tax Credit Payments on Time, but Should Study Lessons Learned, GAO-04-372
(Washington, D.C.: Feb.17, 2004).

20 P.L. 105-206.

21 U.S. General Accounting Office, Internal Revenue Service: Assessment of
Fiscal Year 2004 Budget Request and 2003 Filing Season Performance to
Date, GAO-03-641T (Washington, D.C.: Apr. 8, 2003).

number of individual tax returns filed electronically since 1996.22
Although the current growth rate is about 11 percent, according to IRS
data, the number of electronic filings is ahead of estimates at this time.
Consequently, IRS officials believe IRS will meet and might exceed the
annual growth rate goal of 12 percent by the year's end.

Figure 3: Growth rate in the number of individual income tax returns filed
electronically 1996 - 2004

Note: For 2004, the growth rate compares to the number of returns filed
electronically as of March 12, 2004 to the same period in 2003.

Growth in electronic filing remains a key part of IRS's modernization
strategy. Electronic filing has allowed IRS to reduce resources devoted to
processing (discussed in appendix I) and begin consolidating paper
processing centers. It also reduces errors because IRS would not have to
transcribe tax returns information and some up-front checks are built into
electronic filing. Finally, taxpayers get refunds quicker with electronic
filing-IRS's goal for refunds for electronically filed returns is about
half the 40 days that IRS allows for refunds for returns filed on paper.

22 Some slowing of the growth rate might be expected because, for example,
taxpayers most easily attracted to electronic filing have already been
converted.

IRS has implemented numerous initiatives over the years intended to
increase electronic filing usage. IRS's new major electronic filing
initiatives this year are related to business not individual income tax
returns. They are modernized E-File, which allows the electronic filing of
corporate income tax form 1120 and E-Services, which is a suite of
Internet services offered to tax practitioners such as electronic account
resolution and transcript delivery. IRS officials do not expect these
initiatives to dramatically increase electronic filing of individual tax
returns this year, because taxpayers and practitioners will need to adjust
their behavior and take advantage of the new services. However, these
initiatives are important, because they should increase the willingness of
tax practitioners to file both corporate and individual tax returns
electronically in future filing seasons, which can currently be done only
on a limited basis for corporate returns.

IRS made some changes to improve the Free File Alliance23 program, which
began last year to promote electronic filing of individual income tax
returns. As of March 7, 2004, IRS had received almost 2.5 million free
file tax returns compared to 2.0 million for the same time last year-an
increase of 24 percent. One issue with the Free File program is that IRS
cannot determine how many of the Free File users are new electronic
filers. We plan to follow up on this issue as part of our annual filing
season report.

Telephone Access Improved Over Last Two Years, While Tax Law Accuracy
Declined

Access to IRS's toll-free telephone lines has improved over the last two
years, although account accuracy (the accuracy of answers to questions
from taxpayers about the status of their accounts) has stabilized and tax
law accuracy declined. As table 5 shows, as of March 13, 2004, IRS had
received 29 million telephone calls. The percentage of taxpayers that
attempted to reach an assistor and actually got through and received
service-referred to as the Customer Service Representative (CSR) level of
service-increased to 84 percent, which is 2 percentage points over the
same period last year and 22 percentage points over the same period in
2002. According to IRS officials, the gains in CSR level of service are
largely due to continued improvements resulting from increased

23 In 2003 IRS entered into a 3-year-agreement with the Free File
Alliance, a consortium of tax preparation companies, to provide free
electronic filing to taxpayers that access any of the companies via a link
from the IRS Web site. IRS is in the second year of its initiative with
the Free File Alliance, and there are currently 17 companies that are
offering free filing via IRS's Web site.

specialization, improved technology, and continued focus on maintaining
telephone staffing.

IRS estimates that accounts accuracy is essentially the same this year as
for the last two years at this time. As shown in table 5, taxpayers who
called about their accounts received correct information an estimated 89
percent of the time in 2004. IRS officials said that accounts accuracy
rates remained stable, because the accounts workload has remained
relatively stable.

At the same time, table 5 shows that IRS estimates that tax law accuracy
declined from 84 percent in 2002 and 82 percent last year to 76 percent so
this year. IRS officials said that tax law accuracy rates declined because
formatting changes made in 2003 to the guide CSRs use to help them answer
questions have not enhanced the usability as IRS anticipated. According to
IRS, although training was provided to the staff for the changes to their
assigned subjects, IRS underestimated the impact these changes would have
on overall quality. Also, IRS officials said they have begun redesigning
the CSRs' guide and are continuing to conduct detailed analysis of quality
data to identify immediate opportunities to improve the accuracy of
service.

Web Site Usage is Increasing, But Concerns About Usability Still Exist

IRS's Web site use has increased over the last 2 years as shown in table
6. Also, an independent Web site rater reported that, for 7 of out 10
weeks of the filing season, IRS's Web Site has ranked in the top 10 out of
40 in a government Web site index for time it took to download
information.

Over the last 2 years, IRS has added two features to assist taxpayers,
which likely contributed to the increased usage of the IRS Web site. In
fiscal year 2003, IRS added the "Where's My Refund?" and in 2004 added
"Remember Your Advanced Child Tax Credit" features. The "Where's My
Refund?" feature enables taxpayers to access IRS's Web site to determine
if IRS received their tax return, whether their refund was processed, and
if processed, when approximately to expect the refund. Table 5 shows that
as of March 20, 2004, the use of this feature was up by 53 percent from
last year, from about 9.3 million attempts to about 14.3 million. The
"Remember Your Advanced Child Tax Credit" enables a person to access IRS's
Web site to determine the amount of the advanced child tax credit they
received. As of March 21, 2004, about 8.5 million accesses have been made
to the "Remember Your Child Tax Credit" feature.

Overall we found that IRS's Web site continues to improve when it comes to
providing services to taxpayers. However, we continue to have concerns
about the forms and publication search function. We found that the forms
and publication search function still does not always make the most
pertinent information readily available. For example, when we typed,
"earned income tax credit" into the forms and publication search function,
Publication 596-the primary publication on the earned income tax
credit-was the 79th item on the list and we had to scroll through eight
pages to find it.

Use of IRS's Walk-in Assistance Sites Continues to Decline

The number of taxpayers receiving assistance at IRS walk-in sites
continued to decline. At any one of IRS's over 400 walk-in sites,
taxpayers get various types of assistance, including answers to tax law
questions, assistance with their accounts, and return preparation
assistance (generally for low income taxpayers).

The number of people who received assistance at an IRS walk-in site
declined by 11 percent compared to the same period last year. IRS
continues to restrict free tax preparation services to, for example,
taxpayers with an annual gross income level of $35,000 or less, because of
the labor intensive nature of that work and to enable staff to concentrate
on other services that only IRS can provide such as account assistance.
IRS reduced the number of staff available for return preparation by 20
percent from 2003. As the data in table 5 indicate, the number of returns
being prepared has decreased by about 36 percent over this time last year.
These trends are consistent with ones we have previously reported for
recent filing seasons.24

Figure 4 shows a downward trend in the overall assistance provided and in
the return preparation at the walk-in sites.

24 GAO-04-84.

Figure 4: Assistance provided by IRS walk-in and volunteer sites,
2000-2003 filing seasons

Notes: Total walk-in figures shows all IRS face-to-face assistance,
including return preparation, account services, and tax law assistance. It
does not include the number of taxpayers assisted by walk-in employees via
telephone or correspondence, which ranged from about 96,000 in 2000 to
over 150,000 in 2003. Total figures do not include returns prepared at
volunteer sites.

The number of returns prepared at volunteer sites was not available for
the 2000 filing season.

The time periods covered by this figure each began on January 1 and ended
on April 22, 2000; April 21, 2001; April 20, 2002; and April 19, 2003.

Sites staffed by volunteers certified by IRS do not provide the range of
services IRS provides, such as account assistance, and operate primarily
during the filing season. IRS is promoting these as alternatives to its
walk-in assistance sites for certain types of service. IRS works to ensure
that walk-in sites have a listing of services, hours, and locations of the
volunteer sites in their area. As of March 2004, there are approximate
11,600 volunteer sites. IRS also promotes its telephone operations and Web
site at its walk-in sites as well.

Concluding Observations

The quality of tax law assistance25 provided at IRS's walk-in sites in
2004 was comparable to the same period last year. This conclusion is based
on TIGTA reviews26 through February 2004.

Congress has been supportive of IRS's efforts to improve service to
taxpayers and increase enforcement staff and IRS has succeeded at the
former. However, despite budgets that were almost fully funded and
realizing savings through efficiency gains, IRS has not been able to
increase enforcement staff. In fact, staffing of key enforcement
occupations has declined. The declines in IRS's enforcement staff and the
related declines in its enforcement efforts raise concerns that taxpayers'
incentives to voluntarily comply with their tax obligations could be
eroding.

Strengthening enforcement programs by increasing staffing while providing
a high level of taxpayer service will continue to be a challenge for IRS.
Unbudgeted costs are expected to compete for the funds IRS has allocated
in its 2005 budget request for new spending including the enforcement
initiatives. If, as has been the case in recent years, IRS fails to
realize all expected savings then the funds available for new spending
would be further reduced.

One option for increasing enforcement staff in the near-term is to
reconsider the level and types of service IRS provides to taxpayers.
Taxpayer services are much improved raising a question about the
appropriate balance to strike between investing in further service
improvements and enforcement. At the same time, the use of IRS's walk-in
assistance sites is declining. The improvements in telephone service,
increased Web site use, and the availability of volunteer sites raise a
question about whether IRS should continue to operate as many walk-in
sites. Reconsidering the level and types of service is an option-but not a

25 IRS determines the quality of account assistance after the filing
season. Only tax law assistance is evaluated during the filing season.

26 TIGTA determines tax law accuracy by measuring the percentage of
correct answers to questions asked during anonymous visits to a sample of
walk-in sites. Questions were designed by TIGTA to cover a range of tax
law topics and assess whether taxpayers were receiving correct answers to
questions that a taxpayer might ask when visiting a walk-in site. The
TIGTA results are statistically valid only for the times and the locations
within which respondents were surveyed.

recommendation-to be considered by IRS management and the Congress.

The challenge of increasing IRS's enforcement staff highlights the
importance of succeeding with NRP and BSM. NRP should, if completed
successfully, provide the first new data to estimate the voluntary
compliance rate since IRS last estimated the compliance rate using 1988
data. The new estimates could have implications for future IRS budgets. If
compliance rates are comparable to those estimated using 1988 data, the
pressure to increase IRS' s enforcement staff would likely diminish. If,
however, compliance rates are down, the pressure to increase enforcement
staff and the pressure on IRS's budget could increase.

BSM and related initiatives such as electronic filing hold the long-term
promise of efficiency gains that could allow IRS to improve both taxpayer
service and enforcement without significant budget increases. However,
cost overruns and schedule delays associated with on-going BSM projects,
along with planned reductions to the BSM project portfolio mean that many
of these benefits will not be realized in the short term. As we have
recommended, various management controls and capabilities need to be fully
implemented and institutionalized. Otherwise the projects will likely
encounter additional cost and schedule shortfalls.

Appendix I: How IRS Allocated Expenditures and Staff Resources in Fiscal Year
2003

In our review of IRS's 2004 budget request, we provided figures showing
IRS's expenditures and staff allocations in fiscal year 2002.1 Figures 5
and 6 illustrate how the Internal Revenue Service (IRS) allocated
expenditures and staff in fiscal year 2003.

Figure 5 shows that total expenditures increased from $10.4 billion in
2002 to $11.8 billion in 2003. While the division of expenditures across
categories has generally remained the same as 2002 allocations, equipment
increased from 4 to 6 percent of total expenditures from 2002 to 2003.

$.70 billion

Rent

$.63 billion

Equipment

$.62 billion

4%

Communications and utilities

$.42 billion

Figure 5: IRS's expenditures in fiscal year 2003

Labor

$7.5 billion

Contracts

$.93 billion

Other nonlabor costs

Total expenditures

$11.8 billion

Figure 6 shows IRS's total staff resources have decreased slightly from
99,180 in 2002 to 98,381 in 2003. IRS's allocation of staffing resources
remained largely similar, but with a 1 percentage point decrease in the
percent of staff years processing tax returns. The boundaries between the
categories presented in these figures may not be well defined. For

1 GAO-03-641T.

example, staff categorized under providing management and other services
could also be considered under taxpayer service, processing, or
compliance. Therefore, the figures are meant to provide a summary of how
IRS uses its resources and should be interpreted with caution. However,
the 1 percentage point decrease in staff years devoted to processing tax
returns is important because it represents a cumulative payoff from
electronic filing and shows the potential for shifting IRS resources from
one area to another.

Figure 6: How IRS spent its 98,381 staff years in fiscal year 2003

21,097 staff years assisting taxpayers

                       Source: GAO analysis of IRS data.

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