Internal Revenue Service: Assessment of Fiscal Year 2006 Budget  
Request and Interim Results of the 2005 Filing Season (14-APR-05,
GAO-05-416T).							 
                                                                 
The Internal Revenue Service (IRS) has been shifting its	 
priorities from taxpayer service to enforcement and its 	 
management of Business Systems Modernization (BSM) from 	 
contractors to IRS staff. Although there are sound reasons for	 
these adjustments, they also involve risks. With respect to the  
fiscal year 2006 budget request, GAO assessed (1) how IRS	 
proposes to balance its resources between taxpayer service and	 
enforcement programs and the potential impact on taxpayers, (2)  
the status of IRS's efforts to develop and implement the BSM	 
program, and (3) the progress IRS has made in implementing best  
practices in developing its Information Technology (IT) 	 
operations and maintenance budget. For the 2005 filing season,	 
GAO assessed IRS's performance in processing returns and	 
providing taxpayer service.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-416T					        
    ACCNO:   A20997						        
  TITLE:     Internal Revenue Service: Assessment of Fiscal Year 2006 
Budget Request and Interim Results of the 2005 Filing Season	 
     DATE:   04/14/2005 
  SUBJECT:   Agency missions					 
	     Budget administration				 
	     Budget controllability				 
	     Comparative analysis				 
	     Electronic government				 
	     Federal funds					 
	     Federal law					 
	     Information technology				 
	     Internal controls					 
	     Performance management				 
	     Performance measures				 
	     Program evaluation 				 
	     Program management 				 
	     Schedule slippages 				 
	     Tax administration 				 
	     Taxpayers						 
	     Budget requests					 
	     Program goals or objectives			 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 

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GAO-05-416T

     

     * IRS's Budget Request Continues to Shift Priority from Taxpayer Service
       to Enforcement, but the Short- and Long-term Impacts on Taxpayers Are
       Unclear
          * IRS Is Proposing Reductions in Taxpayer Service and BSM and
            Increases in Enforcement
               * IRS Is Proposing $39 Million Less for Taxpayer Service, but
                 the Impact on Taxpayers Is Unclear
               * IRS Continues to Request Significant Increases for
                 Enforcement to Build on Recent Hiring Gains
          * IRS Is Developing Long- term Goals That Can Be Used to Assess
            Performance and Make Budget Decisions
          * This Is an Opportune Time to Review IRS's Menu of Taxpayer
            Services
     * Progress in BSM Implementation, but the Program Remains High Risk and
       Budget Reductions Have Resulted in Significant Adjustments
          * IRS Has Made Progress in Implementing BSM, but Much Work Remains
          * BSM Program Has History of Cost Increases and Schedule Delays and
            Is High Risk
          * IRS Is Adjusting the BSM Program in Response to Budget Reductions
     * Additional Actions Needed to Improve Budgeting for IT Operations and
       Maintenance
     * So Far This Filing Season IRS Has Generally Maintained or Improved
       Performance, Including Telephone Accuracy, with Less Funding
          * Processing Has Been Smooth, Staff Continues to Decline, and
            Electronic Filing Continues to Grow but not at a Rate to Meet
            Long-term Goal
          * Telephone Access Has Remained Relatively Stable and Accuracy Has
            Improved
          * Web Site Performing Well and Used Extensively
          * Use of IRS's Walk-in Assistance Continues to Decline, While Use
            of Volunteer Assistance Increases
     * Conclusions
     * Recommendation
     * Description of IRS's Proposed Budget Structure
     * BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary
     * How IRS Allocated Expenditures and Full- Time Equivalents in Fiscal
       Year 2004

                 United States Government Accountability Office

Testimony

GAO

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

    For Release on Delivery Expected at 12 p.m. EDT Thursday, April 14, 2005

INTERNAL REVENUE SERVICE

 Assessment of Fiscal Year 2006 Budget Request and Interim Results of the 2005
                                 Filing Season

Statement of James R. White Director Strategic Issues

Statement of David A. Powner Director Information Technology Management Issues

This testimony, originally scheduled for April 7, 2005, was rescheduled
for April 14, 2005.

                                       A

  GAO-05-416T

INTERNAL REVENUE SERVICE

Assessment of Fiscal Year 2006 Budget Request and Interim Results of the
2005 Filing Season

  What GAO Found

IRS's fiscal year 2006 budget request of $10.9 billion proposes increased
funding for enforcement, but reduced funding for taxpayer service and BSM.
However, the potential impact of these changes on taxpayers in either the
short- or long-term is unclear, because IRS has not provided details of
proposed taxpayer service reductions, and although it is developing
long-term goals, they are not yet finalized. Because of the proposed
reductions and new and improved taxpayer services in recent years, this is
an opportune time to examine the menu of services IRS provides. It may be
possible to maintain the overall level of service to taxpayers by
offsetting reductions in some areas with new and improved service in other
areas.

Taxpayers and IRS are seeing some payoff from the BSM program, with the
deployment of initial phases of several modernized systems in 2004.
Nevertheless, the BSM program continues to be high-risk, in part, because
projects have incurred significant cost increases and schedule delays and
the program faces major challenges in areas such as human capital and
requirements management. As a result of budget reductions and other
factors, IRS has made major adjustments. It is too early to tell what
effect these adjustments will have on the program, but they are not
without risk and could potentially impact future budgets. Further, the BSM
program is based on strategies developed years ago, which, coupled with
the delays and changes brought on by budget reductions, indicates that it
is time for IRS to revisit its long-term goals, strategy, and plans for
BSM. Because of these challenges, IRS is redefining and refocusing the BSM
program.

IRS has generally maintained or improved its filing season performance in
2005. Processing is more efficient, the accuracy of answers provided by
telephone assistors is improved, and telephone access is relatively
comparable to last year. This is particularly noteworthy, because IRS
received less funding for taxpayer service in 2005 than it spent in 2004.
Because the filing season is not over, the full impact on taxpayers and
IRS operations is not yet known. However, there are indications of
slippage in telephone access such as more abandoned calls and longer wait
times.

IRS Budget Summary for Key Activities, Fiscal Years 2004-2006 (dollars in
                                   millions)

                                                   Percent   Percent  Percent 
                      Fiscal    Fiscal     Fiscal  change    change    change 
                   year 2004 year 2005 year 2006   (2004-    (2005-    (2004- 
                   (enacted) (enacted) (request)    2005)     2006)     2006) 
Taxpayer                                                           
service            $3,710    $3,606     $3,567   -2.8%     -1.1%     -3.8% 
Enforcement         6,052     6,392      6,893       5.6       7.8    13.9 

BSM 388 203 199 -47.6 -2.0 -48.7                                           
Source: GAO analysis of IRS data.                                          
Note: Numbers may not add due to rounding.                                 
                               United States Government Accountability Office 

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 2006 budget request and
performance during the 2005 tax filing season.

IRS is in the midst of making significant adjustments to its modernization
strategy to better serve taxpayers and ensure their compliance with the
nation's tax laws. It is now seven years since the passage of the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA 98)1 and IRS is
shifting its priorities from improving taxpayer service to strengthening
tax law enforcement efforts. IRS is also adjusting its strategy for
managing its Business Systems Modernization (BSM) effort by shifting
significant program management responsibilities from contractor to IRS
staff. Although there are sound reasons for these adjustments, they also
involve risk.

We have reported that IRS has made progress improving taxpayer service
since the passage of RRA 98.2 For example, IRS's telephone assistance is
now more accessible and accurate. Further, IRS is more efficient at
processing tax returns, in part, because of the growth of electronic
filing, and has cut processing staff. IRS has also implemented some
modernized information systems and increased its capacity to manage large
systems acquisition and development programs.

However, progress has not been uniform. We have reported on large and
pervasive declines in IRS's tax law enforcement programs after 1998. We
have also reported that a number of systems modernization projects were
over budget and behind schedule.3

As noted, IRS is shifting its priorities to better address these problems.
The risk, as IRS shifts its priorities towards enforcement, is that some
of the gains in the quality of taxpayer service could be surrendered.
There are

1 Pub. L. No. 105-206 (1998).

2 See for example, GAO-05-67, Tax Administration: IRS Improved Performance
in the 2004 Filing Season, But Better Data on the Quality of Some Services
Are Needed

(Washington, D.C.: Nov. 15, 2004).

3 GAO, Internal Revenue Service: Assessment of Fiscal Year 2005 Budget
Request and 2004 Filing Season Performance, GAO-04-560T (Washington, D.C.:
Mar. 30, 2004).

      Page 1 GAO-05-416T

analogous risks associated with moving more of the management of BSM
in-house.

With these risks in mind, our statement discusses both IRS's fiscal year
2006 budget request and 2005 filing season performance to date. To address
your request, we assessed (1) how IRS proposes to balance its resources
between taxpayer service and enforcement programs and the potential impact
on taxpayers, (2) the status of IRS's efforts to develop and implement the
BSM program, and (3) the progress IRS has made in implementing best
practices for developing its information technology (IT) operations and
maintenance budget. With respect to the interim results of key 2005 filing
season activities, we compared IRS's performance to past years' and goals
it set for this year.

Our assessment of the budget request and BSM is based on a comparative
analysis of IRS's fiscal year 2002 through 2006 budget requests, funding,
expenditures, other documentation, and interviews with IRS officials. Our
assessment of the interim results of the filing season is based on
comparing IRS's performance this year to previous filing seasons, viewing
operations at a processing center, call sites, and walk-in sites,
monitoring various production meetings, interviewing IRS and Treasury
Inspector General for Tax Administration (TIGTA) officials and paid tax
practitioners and other external stakeholders, reviewing TIGTA and other
external reports, and reviewing IRS's Web site. For both assessments, we
used historical budget and performance data from reports and budget
requests used by IRS, Department of Treasury, and Office of Management and
Budget (OMB). In past work, we assessed IRS's budget and performance
data.4 Since the data sources and procedures for producing this year's
budget and performance data have not significantly changed from prior
years, we determined that the budget data and filing season performance
data were sufficiently reliable for the purposes of this report. The
budget and performance data for fiscal years 2005 and 2006 are subject to
change. Regarding our analysis of IRS's BSM program, we primarily used the
agency's BSM expenditure plans to determine the status of the program. To
assess the reliability of the cost and schedule information contained in
these plans, we interviewed applicable IRS officials to gain an
understanding of the data and discuss

4 GAO, Tax Administration: IRS Needs to Further Refine Its Tax Filing
Season Performance Measures, GAO-03-143 (Washington, D.C.: Nov. 22, 2002)
and GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial
Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004).

      Page 2 GAO-05-416T

our use of that data. In addition, we checked that information in the
plans was consistent with information contained in IRS internal briefings.
Accordingly, we determined that the data in the plans were sufficiently
reliable for purposes of this statement. We performed our work in
Washington, D.C. and Atlanta, Georgia from December 2004 through March
2005, in accordance with generally accepted government auditing standards.

In summary, our assessment shows that:

     o IRS's 2006 fiscal year budget request reflects a continuing shift in
       priorities from improving taxpayer service to strengthening
       enforcement efforts, but the potential impact of these changes on
       taxpayers in both the short- and long-term is unclear. IRS is
       requesting $10.9 billion, an increase of 3.7 percent over fiscal year
       2005 enacted levels. This includes an 8 percent increase for
       enforcement, and a 1 percent and 2 percent decrease for taxpayer
       service and BSM, respectively. IRS has not finalized the details on
       where reductions in taxpayer service would occur. In addition, IRS is
       developing, but currently lacks, long-term goals that can help IRS
       inform stakeholders, including the Congress, and aid them in assessing
       performance and making budget decisions. In light of the current
       budget environment and IRS's improvements in taxpayer service over the
       last several years, this is an opportune time to reconsider the menu
       of services it provides. It may be possible to maintain the overall
       level of assistance to taxpayers by changing the menu of services
       offered, offsetting reductions in some areas with new and improved
       service in other areas.
          * IRS has taken important steps forward towards implementing the
            BSM program by delivering the initial phases of several
            modernized systems in 2004 and early 2005. Nevertheless, BSM
            continues to be high risk because, in part, its projects have
            incurred significant cost increases and schedule delays, and the
            program continues to face major challenges. As a result of
            funding reductions and other factors, IRS has made major
            adjustments to the BSM program, including reducing the management
            reserve and changing the mix and roles of contractor versus
            federal staff used to manage the program. It is too early to tell
            what effect these adjustments will ultimately have on the BSM
            program, but they are not without risk, could potentially impact
            future budget requests, and will delay the implementation of
            certain functionality that was intended to provide benefit to IRS
            operations and taxpayers. Finally, the BSM program is based on
            visions and strategies developed years ago, which,
          * coupled with the already significant delays the program has
            experienced and the changes brought on by the budget reductions,
            indicates that it is time for IRS to revisit its long-term goals,
            strategy, and plans for BSM, including an assessment of when
            significant future BSM functionality would be delivered.
            According to the Associate Chief Information Officer (CIO) for
            BSM, IRS is redefining and refocusing this program.
          * IRS has made progress toward implementing investment management
            best practices that would improve its budget development and
            support for its IT operations and maintenance funding requests.
            For example, the recent release of a new accounting system
            included an activity-based cost module, which IRS considered to
            be a necessary action to implement these best practices. However,
            Office of the Chief Financial Officer officials stated that IRS
            needs 3 years of actual costs to have the historical data
            necessary to provide a basis for future budget estimates.
            Accordingly, they expect that IRS will begin using the
            activity-based cost module in formulating the fiscal year 2008
            budget and will have the requisite 3 years of historical data in
            time to develop the fiscal year 2010 budget.
          * Our assessment of the 2005 filing season to date shows that:
     o IRS has generally maintained or improved its 2005 filing season
       performance compared to last year. Electronic filing continues to
       increase, allowing IRS to continue reducing resources devoted to
       processing. However, IRS may not meet this year's electronic filing
       goal and is likely to not to meet its goal of 80 percent of all
       individual tax returns filed electronically by 2007. Access to
       telephone assistors remains relatively comparable to last year,
       although there are other indications of slippage in telephone access
       such as more abandoned calls and longer wait times. The tax law
       accuracy rate for answers provided via telephone or IRS's Web site has
       improved. IRS's performance so far in 2005 is good news, considering
       IRS received $104 million less in fiscal year 2005 than 2004 for
       taxpayer services. IRS plans to absorb this reduction, in part, by
       consolidating paper-processing operations, shifting resources from
       service to enforcement, and reducing some services-for example,
       reducing access to telephone assistors-in 2005. However, the filing
       season is not over, and whether or not IRS will achieve efficiency
       increases and the impact on IRS operations and taxpayers is not yet
       known.

  IRS's Budget Request Continues to Shift Priority from Taxpayer Service to
  Enforcement, but the Short- and Long-term Impacts on Taxpayers Are Unclear

IRS's fiscal year 2006 budget request reflects a continuing shift in
priorities by proposing reductions in taxpayer service and increases in
enforcement activities. The request does not provide details about how the
reductions will impact taxpayers in the short-term. Nor does IRS have
long-term goals; thus the contribution of the fiscal year 2006 budget
request to achieving IRS's mission in the long-term is unclear. Because of
budget constraints and the progress IRS has made improving the quality of
taxpayer services, this is an opportune time to reconsider the menu of
services IRS offers.

IRS Is Proposing Reductions in Taxpayer Service and BSM and Increases in
Enforcement

IRS is requesting $10.9 billion, which includes just over a 1 percent
decrease for taxpayer service, a 2 percent decrease for BSM, and nearly an
8 percent increase for enforcement, as shown in table 1.5 As table 1
further shows, the changes proposed in the 2006 budget request continue a
trend from 2004. In comparison to the fiscal year 2004 enacted budget, the
2006 budget request proposes almost 4 percent less for service, almost 49
percent less for BSM, and nearly 14 percent more for enforcement.6

5 IRS is proposing a new budget structure beginning in fiscal year 2006.
The proposal would integrate support costs and the IT appropriation into
taxpayer assistance and operations appropriation with eight program areas
involving both taxpayer service and enforcement. See appendix I for
information on the new budget structure.

6 The Administration proposes to fully fund enforcement efforts and costs
as contingent appropriations. This would be achieved by using one of two
budgetary mechanisms that would allow for an adjustment to total
discretionary spending for fiscal year 2006 of not more than $446 million
for IRS tax enforcement.

Table 1: IRS Budget Summary for Key Activities, Fiscal Years 2004-2006
(dollars in millions)

                                                   Percent  Percent   Percent 
                   Fiscal     Fiscal       Fiscal  change   change     change 
                year 2004 year 2005  year 2006     (2004-   (2005-     (2004- 
                (enacted) (enacted) (requested)    2005)       2006)    2006) 
Taxpayer                                                          
Service         $3,710    $3,606        $3,567  -2.8%       -1.1%    -3.8% 
Enforcement      6,052     6,392         6,893      5.6       7.8     13.9 
BSM                388           203       199    -47.6      -2.0    -48.7 

Source: GAO analysis of IRS data.

Note: Numbers may not add due to rounding.

As table 1 also shows, taxpayer service sustained a reduction of $104
million or 2.8 percent between fiscal years 2004 and 2005. According to
IRS officials, the majority of this reduction was the result of
consolidating paper-processing operations, shifting resources from service
to enforcement, and reducing some services. IRS officials said that this
reduction is not expected to adversely impact the services they provide to
taxpayers but added that the agency cannot continue to absorb reductions
in taxpayer service without beginning to compromise some services.

For fiscal years 2005 and 2006, table 2 shows some details of changes in
both dollars and full-time equivalents (FTE).7 Both are shown because
funding changes do not translate into proportional changes in FTEs due to
cost increases for salaries, rent, and other items. For example, the $39
million or 1.1 percent reduction in taxpayer service translates into a
reduction of 1,385 FTEs or 3.6 percent. Similarly, the over $500 million
or

7.8 percent increase in enforcement spending translates into an increase
of 1,961 FTEs or 3.4 percent.

7 According to IRS, an FTE is the equivalent of one person working full
time for 1 year without overtime.

Page 6 GAO-05-416T

Table 2: IRS Requested Changes in Funding for Taxpayer Service and Enforcement,
                     Fiscal Years 2005 and 2006 (requested)

                                                      Change fiscal year 2005 -
       Fiscal year 2005 (estimated) Fiscal year 2006        fiscal year 2006
                                    (requested)           
                Dollars   Full-time   Dollars   Full-time   Dollars   Full-time
Program             (in equivalents    (in    equivalents    (in    equivalents
activities    millions)             millions)             millions) 
Assistance       $1,829      20,798    $1,806      20,160     - $23       - 638
Outreach            500       2,473       466       1,905      - 34       - 568
Processing        1,276      15,695     1,295      15,516        19       - 179
Taxpayer                                                                 
service           3,606      38,966     3,567      37,581      - 39     - 1,385
subtotal                                                            
Research            154       1,119       158       1,119         4           0
Examination       3,478      31,498     3,712      32,284       234         786
Collection        1,826      18,023     1,991      18,815       165         792
Investigation       682       4,899       767       5,250        85         351
Regulatory          253       1,912       265       1,944        12          32
Enforcement       6,392      57,451     6,893      59,412       500       1,961
subtotal                                                            
Taxpayer                                                  
service and                                               
enforcement          9,998   96,417    10,460      96,993      462          576 
total                                                                    

IRS Is Proposing $39 Million Less for Taxpayer Service, but the Impact on
Taxpayers Is Unclear

Source: GAO analysis of IRS data.

Note: Numbers may not add due to rounding.

The difference between changes in dollars and FTEs could be even larger
because of unbudgeted expenses. Unbudgeted expenses have consumed some of
IRS's budget increases and internal savings increases over the last few
years. Unbudgeted expenses include unfunded portions of annual salary
increases, which can be substantial given IRS's large workforce, and other
costs such as higher-than-budgeted rent increases. According to IRS
officials, these unbudgeted expenses accounted for over $150 million in
each of the last 4 years.

An IRS official also told us they anticipate having to cover unbudgeted
expenses in 2006. As of March 2005, IRS officials were projecting
unbudgeted salary increases of at least $40 million. This projection could
change since potential federal salary increases for 2006 have not been
determined.

The budget request provides some detail on how IRS plans to absorb cost
increases in the taxpayer service budget. IRS is proposing a gross
reduction of over $134 million in taxpayer service from reexamining the
budget's base and plans to use more than $95 million of it to cover annual
increases such as salaries. This leaves a net reduction of nearly $39
million or 1.1 percent in the taxpayer service budget. The extent to which
IRS is able to achieve the gross reductions will impact its ability to use
the funds as anticipated.

Decisions on how the $134 million gross reduction would be absorbed were
not finalized prior to releasing the budget. According to IRS officials,
some of the reductions would result from efficiency gains such as reducing
printing and postage costs; however, others would result from reductions
in the services provided to taxpayers such as shortening the hours of
toll-free telephone service operations. The officials also said most
decisions have now been made about general areas for reduction and most
changes will not be readily apparent to taxpayers.

Although IRS has made general decisions about the reductions, many of the
details have yet to be determined. Therefore, the extent of the impact on
taxpayers in the short term is unclear. For example, IRS plans to reduce
dependence on field assistance, including walk-in sites, but has not
reached a final decision on how to reduce services. Table 3 provides
further detail on how IRS is proposing to reduce funding and resources for
taxpayer service.

Table 3: IRS Requested Changes in Funding and Full-time Equivalents for Taxpayer
                      Service, Fiscal Years 2005 and 2006

                                                            Change fiscal year
    Fiscal year 2005 (actual) Fiscal year 2006                 2005-2006
                              (requested)                
               Dollars   Full-time   Dollars   Full-time   Dollars   Full-time 
  Program          (in equivalents    (in    equivalents    (in    equivalents 
  activities millions)             millions)             millions) 

Electronic Assistance     $1,536   17,745   $1,557   17,721   $21      -24 
Field                         274  2,796     230     2,181    -44     -615 
EITC assistance                19   258       19      258     < 1        0 
Assistance total          1,829    20,798   1,806    20,160   -23     -638 
Outreach                                                           
Publication & Media           291   821      276      520     -15     -301 
     Taxpayer Education &                                             
Communication                 203  1,592     184     1,326    -19     -266 
EITC Outreach                   7       60    7        60     < 1        0 
Outreach total                500  2,473     466     1,905    -34     -568 
Processing                1,276    15,695   1,295    15,516   19      -179 
Taxpayer service total    3,606    38,966   3,568    37,581   -39   -1,385 

IRS Continues to Request Significant Increases for Enforcement to Build on
Recent Hiring Gains

Source: GAO analysis of IRS data.

Note: Numbers may not add due to rounding.

IRS's fiscal year 2006 budget request is the sixth consecutive year the
agency has requested additional staffing for enforcement. However, up
until last year, IRS was unable to increase enforcement staffing;
unbudgeted costs and other priorities consumed the budget increase.

IRS's proposal for fiscal year 2006, if implemented as planned, would
return enforcement staffing in these occupations to their highest levels
since 1999. Of the more than $500 million increase requested for 2006,
about $265 million would fund enforcement initiatives, over $182 million
would be used in part for salary increases, and over $55 million is a
proposal to transfer funding authority from the Department of Justice's
Interagency Crime and Drug Enforcement. The $500 million increase would be
supplemented by internal enforcement savings of $88 million. As is the
case with taxpayer service savings, the extent to which IRS achieves
enforcement savings will affect its ability to fund the new enforcement
initiatives.

The $265 million for new enforcement initiatives consist of:

     o $149.7 million and 920 FTEs to attack corrosive non-compliance
       activity driving the tax gap such as abusive trusts and shelters,
       including offshore credit cards and organized tax resistance;
     o $51.8 million and 236 FTEs to detect and deter corrosive corporate
       noncompliance to attack complex abusive tax avoidance transactions on
       a global basis and challenge those who promote their use;
     o $37.9 million and 417 FTEs to increase individual taxpayer compliance
       by identifying and implementing actions to address non-compliance with
       filing requirements; increasing Automated Underreporter resources to
       address the reporting compliance tax gap; increasing audit coverage;
       and expanding collection work in walk-in sites;
     o $14.5 million and 77 FTEs to combat abusive transactions by entities
       with special tax status by initiating examinations more promptly,
       safeguarding compliant customers from unscrupulous promoters, and
       increasing vigilance to ensure that the assets of tax-exempt
       organizations are put to their intended tax-preferred purpose and not
       misdirected to fund terrorism or for private gain; and
          * $10.8 million and 22 FTEs to curtail fraudulent refund crimes.
          * The $88 million in internal savings would be reinvested to
            perform the following activities:
     o $66.7 million and 585 FTEs to devote resources to front-line
       enforcement activities;
     o $14.9 million and 156 FTEs to, in part, address bankruptcy-related
       taxpayer questions; and
     o $6.7 million and 52 FTEs to address complex, high-risk issues such as
       compliance among tax professionals.

In the past, IRS has had trouble achieving enforcement staffing increases
because other priorities, including unbudgeted expenses, have absorbed
additional funds. IRS achieved some gains in 2004 and expects modest gains
in 2005. Figure 1 shows that the number of revenue agents (those who audit
complex returns), revenue officers (those who do field collection work),
and special agents (those who perform criminal investigations) decreased
over 21 percent between 1998 and 2003, but increased almost 6 percent from
2003 to 2004.

Figure 1: Revenue Agents, Revenue Officers, and Special Agents, Fiscal
Years 19982006

Full-time equivalents

25,000

20,000

15,000

10,000

5,000

0 1998 1999 2000 2001 2002 2003 2004 2005a 2006a

Fiscal year

Revenue agents Revenue officers Special agents Total agents

Source: GAO analysis of IRS data.

aFiscal years 2005 and 2006 are IRS projections.

IRS's recent gains in enforcement staffing are encouraging, as tax law
enforcement continues to remain an area of high risk for the federal
government because the resources IRS has dedicated to enforcing the tax
laws have declined, while IRS's enforcement workload-measured by the
number of taxpayer returns filed-has continually increased.8 Figure 2
shows the trend in field, correspondence, and total audit rates since
1995. Field audits involve face-to-face audits and correspondence audits
are

8 GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

typically less complex involving communication through notices. IRS
experienced steep declines in audit rates from 1995 to 1999, but the audit
rate-the proportion of tax returns that IRS audits each year-has slowly
increased since 2000. The figure shows that the increase in total audit
rates of individual filers has been driven mostly by correspondence
audits, while more complex field audits, continue to decline.

Figure 2: Audit Rate of Individual Income Tax Returns, Fiscal Years
1995-2004 Audit rate

2.0

1.8

0.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal year

Field Correspondence Total

Source: GAO analysis of IRS data.

The link between the decline in enforcement staff and the decline in
enforcement actions, such as audits, is complicated, and the real impact
on taxpayers' rate of voluntary compliance is not known. This leaves open
the question of whether the declines in IRS's enforcement programs are
eroding taxpayers' incentives to voluntarily comply. IRS's National
Research Program (NRP) recently completed a study on compliance by
individual tax filers based on tax data provided on 2001 tax returns. The
study estimated that the tax gap-the difference between what taxpayers owe
and what they pay-is at least $312 billion per year as of 2001 and could
be as large as $353 billion. This study is important for several

IRS Is Developing Long-term Goals That Can Be Used to Assess Performance
and Make Budget Decisions

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 should also help
IRS better understand the impact of taxpayer service on compliance.

IRS is developing but currently lacks long-term goals that can be used to
assess performance and make budget decisions.9 Long-term goals and results
measurement are a component of the statutory strategic planning and
management framework that the Congress adopted in the Government
Performance and Results Act of 1993.10 As a part of this comprehensive
framework, long-term goals that are linked to annual performance measures
can help guide agencies when considering organizational changes and making
resource decisions.

A recent Program Assessment Rating Tool (PART) review conducted by OMB
reported that IRS lacks long-term goals.11 As a result, IRS has been
working to identify and establish long-term goals for all aspects of its
operations for over a year. IRS officials said these goals will be
finalized and provided publicly as an update to the agency's strategic
plan before May 2005.

For IRS and its stakeholders, such as the Congress, long-term goals can be
used to assess performance and progress towards these goals, and determine
whether budget decisions contribute to achieving those goals.

9 IRS has one long-term goal set by the Congress in RRA 98 for IRS to have
80 percent of all individual income tax returns filed electronically.

10 Pub. L. No. 103-62 (1993). The Government Performance and Results Act
of 1993 seeks to improve the management of federal programs, as well as
their effectiveness and efficiency, by requiring executive agencies to
prepare multiyear strategic plans, annual performance plans, and annual
performance reports. Under the Act, strategic plans are the starting point
for setting goals and measuring progress towards them. The Act requires
executive agencies to develop strategic plans that include an agency's
mission statement, long-term general goals, and the strategies that the
agency will use to achieve these goals. The plans should also explain the
key external factors that could significantly affect achievement of these
goals, and describe how long-term goals will be related to annual
performance goals.

11 The PART was applied during the fiscal year 2004 budget cycle to
"programs" selected by OMB. The PART includes general questions in each of
four broad topics to which all programs are subjected: (1) program purpose
and design, (2) strategic planning,

(3) program management, and (4) program results (i.e., whether a program
is meeting its long-term and annual goals). OMB also makes an overall
assessment on program effectiveness.

This Is an Opportune Time to Review IRS's Menu of Taxpayer Services

Without long-term goals, the Congress and other stakeholders are hampered
in evaluating whether IRS is making satisfactory long-term progress.
Further, without such goals, the extent to which IRS's 2006 budget request
would help IRS achieve its mission over the long-term is unclear.

For at least two reasons, this is an opportune time to review the menu of
taxpayer services that IRS provides. First, IRS's budget for taxpayer
services was reduced in 2005 and an additional reduction is proposed for
2006. As already discussed, these reductions have forced IRS to propose
scaling back some services. Second, as we have reported, IRS has made
significant progress in improving the quality of its taxpayer services.
For example, IRS now provides many Internet services that did not exist a
few years ago and has noticeably improved the quality of telephone
services. This opens up the possibility of maintaining the overall level
of taxpayer service but with a different menu of service choices. Cuts in
selected services could be offset by the new and improved services.

Generally, as indicated in the budget, the menu of taxpayer services that
IRS provides covers assistance, outreach, and processing. Assistance
includes answering taxpayer questions via telephone, correspondence, and
face-to-face at its walk-in sites. Outreach includes educational programs
and the development of partnerships. Processing includes issuing millions
of tax refunds.

When considering program reductions, we support a targeted approach rather
than across-the-board cuts.12 A targeted approach helps reduce the risk
that effective programs are reduced or eliminated while ineffective or
lower priority programs are maintained.

With the above reasons in mind for reconsidering IRS's menu of services,
we have compiled a list of options for targeted reductions in taxpayer
service. The options on this list are not recommendations but are intended
to contribute to a dialogue about the tradeoffs faced when setting IRS's
budget. The options presented meet at least one of the following criteria

12 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO- 05-325SP (Washington, D.C.: February 2005).

Page 14 GAO-05-416T

that we generally use to evaluate programs or budget requests.13 These
criteria include that the activity

     o duplicates other efforts that may be more effective and/or efficient;
     o historically does not meet performance goals or provide intended
       results as reported by GAO, TIGTA, IRS, or others;
     o experiences a continued decrease in demand;
     o lacks adequate oversight, implementation and management plans, or
       structures and systems to be implemented effectively;
     o has been the subject of actual or requested funding increases that
       cannot be adequately justified; or
          * has the potential to make an agency more self-sustaining by
            charging user fees for services provided.
          * We recognize that the options listed below involve tradeoffs. In
            each case, some taxpayers would lose a service they use. However,
            the savings could be used to help maintain the quality of other
            services. We also want to give IRS credit for identifying
            savings, including some on this list. The options include
     o closing walk-in sites. As the filing season section of this testimony
       discusses, taxpayer demand for walk-in services has continued to
       decrease and staff answer a more limited number of tax law questions
       in person than staff answer via telephone.
     o limiting the type of telephone questions answered by IRS assistors.
       IRS assistors still answer some refund status questions even though
       IRS provides automated answers via telephone and its Web site.
     o mandating electronic filing for some filers such as paid preparers or
       businesses. As noted, efficiency gains from electronic filing have
       enabled IRS to consolidate paper processing operations.

13 We selected these criteria from a variety of sources based on generally
accepted government auditing standards.

Page 15 GAO-05-416T

o  charging for services. For example, IRS provides paid preparers with
information on federal debts owed by taxpayers seeking refund anticipation
loans.

Although IRS has implemented important elements of the BSM program, much
work remains. In particular, the BSM program remains at high risk and has
a long history of significant cost overruns and schedule delays.
Furthermore, budget reductions have resulted in significant adjustments to
the BSM program, although it is too early to determine their ultimate
effect.

  Progress in BSM Implementation, but the Program Remains High Risk and Budget
  Reductions Have Resulted in Significant Adjustments

IRS Has Made Progress in Implementing BSM, but Much Work Remains

IRS has long relied on obsolete automated systems for key operational and
financial management functions, and its attempts to modernize these aging
computer systems span several decades. IRS's current modernization
program, BSM, is a highly complex, multibillion-dollar program that is the
agency's latest attempt to modernize its systems. BSM is critical to
supporting IRS's taxpayer service and enforcement goals. For example, BSM
includes projects to allow taxpayers to file and retrieve information
electronically and to provide technology solutions to help reduce the
backlog of collections cases. BSM is important for another reason. It
allows IRS to provide the reliable and timely financial management
information needed to account for the nation's largest revenue stream and
better enable the agency to justify its resource allocation decisions and
congressional budgetary requests.

Since our testimony before this subcommittee on last year's budget
request, IRS has deployed initial phases of several modernized systems
under its BSM program. The following provides examples of the systems and
functionality that IRS implemented in 2004 and the beginning of 2005.

        * Modernized e-File (MeF). This project is intended to provide
          electronic filing for large corporations, small businesses, and
          tax-exempt organizations. The initial releases of this project were
          implemented in June and December 2004, and allowed for the
          electronic filing of forms and schedules for the form 1120
          (corporate tax return) and form 990 (tax-exempt organizations' tax
          return). IRS reported that, during the
        * 2004 filing season, it accepted over 53,000 of these forms and
          schedules using MeF.
     o e-Services. This project created a Web portal and provided other
       electronic services to promote the goal of conducting most IRS
       transactions with taxpayers and tax practitioners electronically. IRS
       implemented e-Services in May 2004. According to IRS, as of late March
       2005, over 84,000 users have registered with this Web portal.
     o Customer Account Data Engine (CADE). CADE is intended to replace IRS's
       antiquated system that contains the agency's repository of taxpayer
       information and, therefore, is the BSM program's linchpin and highest
       priority project. In July 2004 and January 2005, IRS implemented the
       initial releases of CADE, which have been used to process filing year
       2004 and 2005 1040EZ returns, respectively, for single taxpayers with
       refund or even-balance returns. According to IRS, as of March 16,
       2005, CADE had processed over 842,000 tax returns so far this filing
       season.
     o Integrated Financial System (IFS). This system replaces aspects of
       IRS's core financial systems and is ultimately intended to operate as
       its new accounting system of record. The first release of this system
       became fully operational in January 2005.

Although IRS is to be applauded for delivering such important
functionality, the BSM program is far from complete. Future deliveries of
additional functionality of deployed systems and the implementation of
other BSM projects are expected to have a significant impact on IRS's
taxpayer services and enforcement capability. For example, IRS has
projected that CADE will process about 2 million returns in the 2005
filing season. However, the returns being processed in CADE are the most
basic and constitute less than 1 percent of the total tax returns expected
to be processed during the current filing season. IRS expects the full
implementation of CADE to take several more years. Another BSM project-the
Filing and Payment Compliance (F&PC) project-is expected to increase (1)
IRS's capacity to treat and resolve the backlog of delinquent taxpayer
cases, (2) the closure of collection cases by 10 million annually by 2014,
and (3) voluntary taxpayer compliance. As part of this project, IRS plans
to implement an initial limited private debt collection capability in
January 2006, with full implementation of this aspect of the F&PC project
to be delivered by January 2008 and additional functionality to follow in
later years.

BSM Program Has History of Cost Increases and Schedule Delays and Is High
Risk

The BSM program has a long history of significant cost increases and
schedule delays, which, in part, has led us to report this program as
high-risk since 1995.14 Appendix II provides the history of the BSM
life-cycle cost and schedule variances. In January 2005 letters to
congressional appropriation committees, IRS stated that it had showed a
marked improvement in significantly reducing its cost variances. In
particular, IRS claimed that it reduced the variance between estimated and
actual costs from 33 percent in fiscal year 2002 to 4 percent in fiscal
year 2004. However, we do not agree with the methodology used in the
analysis supporting this claim. Specifically, (1) the analysis did not
reflect actual costs, instead it reflected changes in cost estimates
(i.e., budget allocations) for various BSM projects; (2) IRS aggregated
all of the changes in the estimates associated with the major activities
for some projects, such as CADE, which masked that monies were shifted
from future activities to cover increased costs of current activities; and
(3) the calculations were based on a percentage of specific fiscal year
appropriations, which does not reflect that these are multiyear projects.

In February 2002 we expressed concern over IRS's cost and schedule
estimating and made a recommendation for improvement.15 IRS and its prime
systems integration support (PRIME) contractor have taken action to
improve their estimating practices, such as developing a cost and schedule
estimation guidebook and developing a risk-adjustment model to include an
analysis of uncertainty. These actions may ultimately result in more
realistic cost and schedule estimates, but our analysis of IRS's
expenditure plans16 over the last few years shows continued increases in
estimated project life-cycle costs (see fig. 3).

14 For our latest high-risk report, please see GAO, High-Risk Series: An
Update, GAO-05-207 (Washington, D.C., January 2005).

15 GAO, Business Systems Modernization: IRS Needs to Better Balance
Management Capacity with Systems Acquisition Workload, GAO-02-356
(Washington, D.C.: Feb. 28, 2002).

16 BSM funds are unavailable until the IRS submits to congressional
appropriations committees for approval a modernization expenditure plan
that (1) meets the OMB capital planning and investment control review
requirements; (2) complies with IRS's enterprise architecture; (3)
conforms with IRS's enterprise life-cycle methodology; (4) is approved by
IRS, the Department of the Treasury, and OMB; (5) is reviewed by GAO; and
(6) complies with acquisition rules, requirements, guidelines, and systems
acquisition management practices.

Figure 3: Life-cycle Cost Estimates for Key BSM Projects Estimates
(dollars in millions)

20

0 11/01 11/02 3/03 9/03 1/04 7/04

Date expenditure plans submitted to the Congress (month/year)

Customer Account Data Engine, Release 1 e-Services Modernized e-File,
Release 1 Custodial Accounting Project, Release 1 Integrated Financial
System, Release 1

Source: GAO analysis of IRS data.

The Associate CIO for BSM stated that he believes that IRS's cost and
schedule estimating has improved in the past year. In particular, he
pointed out that IRS met its cost and schedule goals for the
implementation of the latest release of CADE, which allowed the agency to
use this system to process certain 1040EZ forms in the 2005 filing season.
It is too early to tell whether this signals a fundamental improvement in
IRS's ability to accurately forecast project costs and schedules.

The reasons for IRS's cost increases and schedule delays vary. However, we
have previously reported that they are due, in part, to weaknesses in
management controls and capabilities. We have previously made
recommendations to improve BSM management controls, and IRS has
implemented or begun to implement these recommendations. For example, in
February 2002, we reported that IRS had not yet defined or implemented an
IT human capital strategy, and recommended that IRS develop plans for

IRS Is Adjusting the BSM Program in Response to Budget Reductions

obtaining, developing, and retaining requisite human capital resources.17
In September 2003, TIGTA reported that IRS had made significant progress
in developing a human capital strategy but that it needed further
development. In August 2004, the current Associate CIO for BSM identified
the completion of a human capital strategy as a high priority. Among the
activities that IRS is implementing are prioritizing its BSM staffing
needs and developing a recruiting plan. IRS has also identified, and is
addressing, other major management challenges in areas such as
requirements, contract, and program management. For example, poorly
defined requirements have been among the significant weaknesses that have
been identified as contributing to project cost overruns and schedule
delays. As part of addressing this problem, in March 2005, the IRS BSM
office established a requirements management office, although a leader has
not yet been hired.

The BSM program is undergoing significant changes as it adjusts to
reductions in its budget. Figure 4 illustrates the BSM program's requested
and enacted budgets for fiscal years 2004 through 2006.18 For fiscal year
2005, IRS received about 29 percent less funding than it requested (from
$285 million to $203.4 million). According to the Senate report for the
fiscal year 2005 Transportation, Treasury, and General Government
appropriations bill, in making its recommendation to reduce BSM funding,
the Senate Appropriations Committee was concerned about the program's cost
overruns and schedule delays. In addition, the committee emphasized that
in providing fewer funds, it wanted IRS to focus on its highest priority
projects, particularly CADE.19 In addition, IRS's fiscal year 2006 budget
request reflects an additional reduction of about 2 percent, or about $4.4
million, from the fiscal year 2005 appropriation.

17 GAO-02-356 .

18 IRS uses the appropriated funds to cover contractor costs related to
the BSM program. IRS funds internal costs for managing BSM with another
appropriation. These costs are not tracked separately for BSM-related
activities.

19 U.S. Senate, Senate Report 108-342.

Page 20 GAO-05-416T

Figure 4: Changes in the BSM budget (dollars in millions)a

e-Services FY04 FY05 FY06 No funds requested for FY06

Filing and Payment Compliance FY04 FY05

No funds appropriated for FY05

FY06

                             Modernized e-File FY04

FY05

FY06

                       Customer Account Data Engine FY04

FY05

FY06

Custodial Accounting Project FY04 FY05 No funds requested for FY05 FY06 No
funds requested for FY06

Integrated Financial System FY04 FY05 No funds requested for FY05 FY06 No
funds requested for FY06

                       Core infrastructure projects FY04

FY05

FY06

                     Architecture, integration, FY04 and management FY05 FY06

                            Management reserve FY04

FY05

FY06

0            10     20        30     40    50    60    70   80   90    100 
Millions of dollars                                                  
                       Requested                                        
                       Enacted                                          

Source: IRS.

a The BSM account authorizes funds to be obligated for 3 years.

It is too early to tell what effect the budget reductions will ultimately
have on the BSM program. However, the significant adjustments that IRS is
making to the program to address these reductions are not without risk,
could potentially impact future budget requests, and will delay the
implementation of certain functionality that was intended to provide
benefit to IRS operations and the taxpayer. For example:

        * Reductions in Management reserve/project risk adjustments. In
          response to the fiscal year 2005 budget reduction, IRS reduced the
          amount that it had allotted to program management reserve and
          project risk adjustments by about 62 percent (from about $49.1
          million to about $18.6 million).20 If BSM projects have future cost
          overruns that cannot be covered by the depleted reserve, this
          reduction could result in
        * (1) increased budget requests in future years or (2) delays in
          planned future activities (e.g., delays in delivering promised
          functionality) to use those allocated funds to cover the overruns.
     o Shifts of BSM management responsibility from the PRIME contractor to
       IRS. Due to budget reductions and IRS's assessment of the PRIME
       contractor's performance, IRS decided to shift significant BSM
       responsibilities for program management, systems engineering, and
       business integration from the PRIME contractor to IRS staff. For
       example, IRS staff are assuming responsibility for cost and schedule
       estimation and measurement, risk management, integration test and
       deployment, and transition management. There are risks associated with
       this decision. To successfully accomplish this transfer, IRS must have
       the management capability to perform this role. Although the BSM
       program office has been attempting to improve this capability through,
       for example, implementation of a new governance structure and hiring
       staff with specific technical and management expertise, IRS has had
       significant problems in the past managing this and other large
       development projects, and acknowledges that it has major challenges to
       overcome in this area.
     o Suspension of the Custodial Accounting Project (CAP). Although the
       initial release of CAP went into production in September 2004, IRS has
       decided not to use this system and to stop work on planned
       improvements due to budget constraints. According to IRS, it made this
       decision after it evaluated the business benefits and costs to develop
       and maintain CAP versus the benefits expected to be provided by other
       projects, such as CADE. Among the functionality that the initial
       releases of CAP were expected to provide were (1) critical control and
       reporting capabilities mandated by federal financial management laws;
       (2) a traceable audit trail to support financial reporting; and (3) a
       subsidiary ledger to accurately and promptly identify, classify,
       track, and report

20 We did not include in our calculations, reductions to specific project
risk adjustment amounts that were made for reasons other than the fiscal
year 2005 budget reduction.

Page 22 GAO-05-416T

  Additional Actions Needed to Improve Budgeting for IT Operations and
  Maintenance

custodial revenue transactions and unpaid assessments. With the

suspension of CAP, it is now unclear how IRS plans to replace the

functionality this system was expected to provide, which was intended

to allow the agency to make meaningful progress toward addressing

long-standing financial management weaknesses. IRS is currently

evaluating alternative approaches to addressing these weaknesses.

o  Reductions in planned functionality. According to IRS, the fiscal year
2006 funding reduction will result in delays in planned functionality for
some of its BSM projects. For example, IRS no longer plans to include Form
1041 (the income tax return for estates and trusts) in the fourth release
of Modernized e-File, which is expected to be implemented in fiscal year
2007.

The BSM program is based on visions and strategies developed in 2000 and
2001. The age of these plans, in conjunction with the significant delays
already experienced by the program and the substantive changes brought on
by budget reductions, indicate that it is time for IRS to revisit its
long-term goals, strategy, and plans for BSM. Such an assessment would
include an evaluation of when significant future BSM functionality would
be delivered. IRS's Associate CIO for BSM has recognized that it is time
to recast the agency's BSM strategy because of changes that have occurred
subsequent to the development of the program's initial plans. According to
this official, IRS is redefining and refocusing the BSM program, and he
expects this effort to be completed by the end of this fiscal year.

IRS has requested about $1.62 billion for IT operations and maintenance in
fiscal year 2006, within its proposed new Tax Administration and
Operations account. Under the prior years' budget structure, these funds
were included in a separate account, for which IRS received an
appropriation of about $1.59 billion in fiscal year 2005. The $1.62
billion requested in fiscal year 2006 is intended to fund the personnel
costs for IT staff (including staff supporting the BSM program) and
activities such as IT security, enterprise networks, and the operations
and maintenance costs of its current systems. We have previously expressed
concern that IRS does not employ best practices in the development of its
IT operations and maintenance budget request.21 Although IRS has made
progress in addressing our concern, more work remains.

The Paperwork Reduction Act (PRA) 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 1996 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. In addition, 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.

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. 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 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

21 GAO, Internal Revenue Service: Improving Adequacy of Information
Systems Budget Justification, GAO-02-704 (Washington, D.C., June 28,
2002).

Page 24 GAO-05-416T

practices.22 To address our recommendation, IRS agreed to take a variety
of actions, which it has made progress in implementing. For example, IRS
stated that it planned to develop an activity-based cost model to plan,
project, and report costs for business tasks/activities funded by the
information systems budget. The recent release of IFS included an
activity-based cost module, but IRS does not currently have historical
cost data to populate this module. According to officials in the Office of
the Chief Financial Officer, IRS is in the process of accumulating these
data. These officials stated that IRS needs 3 years of actual costs to
have the historical data that would provide a basis for future budget
estimates. Accordingly, these officials expected that IRS would begin
using the IFS activity-based cost module in formulating the fiscal year
2008 budget request and would have the requisite 3 years' of historical
data in time to develop the fiscal year 2010 budget request. In addition,
IRS planned to develop a capital planning guide to implement processes for
capital planning and investment control, budget formulation and execution,
business case development, and project prioritization. IRS has developed a
draft guide, which is currently under review by IRS executives, and IRS
expects it to become policy on October 1, 2005. Although progress has been
made in implementing best practices in the development of the IT
operations and maintenance budget, until these actions are completely
implemented IRS will not be able to ensure that its request is adequately
supported.

Results to date show IRS has generally maintained or improved its 2005
filing season performance in key areas compared to last year despite a
decrease in the 2005 budget for taxpayer service. These key areas are
paper and electronic processing, telephone assistance, IRS's Web site, and
walk-in assistance. Table 4 shows performance to date in these four areas.

  So Far This Filing Season IRS Has Generally Maintained or Improved
  Performance, Including Telephone Accuracy, with Less Funding

22 GAO-02-704 .

  Table 4: IRS Performance in the First Weeks of the Filing Season, 2002-2005

Volume in thousands                          2002     2003    2004    2005 
Actual returns processeda                                          
Paper                                      24,491   22,117  20,232  17,607 
Electronic                                 35,067   38,627  42,988  45,848 
Telephone assistance                                               
Total callsb                               34,489   27,905  29,058  23,340 
Answered by assistors                       9,208    9,434  10,116   9,421 
Answered by automation                     25,281   18,471  18,942  13,919 
Customer service representative level of      62%      82%     84%     83% 
service                                                            
Average speed of answerc                      227      183     199     235 
                                             seconds seconds  seconds seconds 

Accounts accuracy rate estimatesd   88% +/- 1% 88% +/-   89% +/-   92% +/- 
                                                  1%        1%        1%      
Tax law accuracy rate estimatesd           84%    81%          76%     87% 
                                           +/- 1%  +/- 1%    +/- 1%    +/- 1% 
Internet assistance                                                
Forms and publications downloadede         N/A       N/A       N/A  70,321 
Refund status inquiriesf                   N/A   9,300    14,300    16,400 
Walk-in assistance                                                 
Total walk-in contactsg                    N/A   2,740     2,433     2,163 
Returns prepared at IRS walk-in            436       291       186     145 
sitesh                                                             
Returns prepared at volunteer              466       594       741     915 
sitesi                                                             

Source: IRS.

a From January 1 to March 22, 2002; March 21, 2003; March 19, 2004; and
March 18, 2005. b Total calls (i.e., calls answered by assistors and
automation) and CSR level of service are based on actual counts from
January 1 to March 16, 2002; March 15, 2003; March 13, 2004; and March 12,

2005. The 2002 totals include increased call demand as a result of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No.
107-16 (2001). c From January 1 to March 16, 2002; March 15, 2003; March
13, 2004; and March 12, 2005. d Based on a representative sample estimated
at the 90 percent confidence level from January to

February 2002, 2003, 2004, and 2005. e As of February 28, 2005. f From
January 1 to March 20, 2003; 2004; and 2005. g From January 1 to March 15,
2003; March 13, 2004; and March 12, 2005. h From January 1 to March 16,
2002; March 15, 2003; March 13, 2004; and March 12, 2005.

i

From January 1 to March 9, 2002; March 8, 2003; March 13, 2004; and March
12, 2005.

Processing Has Been Smooth, Staff Continues to Decline, and Electronic
Filing Continues to Grow but not at a Rate to Meet Long-term Goal

Overall IRS's filing season performance to date is good news because, as
table 1 shows (page 6), IRS's budget for taxpayer service is $104 million
less than the year before. According to IRS officials, it absorb this
reduction by generating additional internal savings and program
reductions. However, because the filing season is not over, the extent to
which IRS will achieve efficiency gains and the full impact of reductions
on taxpayers in this or future filing seasons is not yet known.

As of March 18, IRS processed about 63 million individual income tax
returns and 57 million refunds. According to IRS data and information from
external stakeholders such as paid practitioners, processing has been
uneventful and without significant disruptions. IRS officials attribute
this year's smooth processing to adequate planning and few tax law
changes. This year's processing activities are important, in part, because
for the first time during the filing season, IRS is using CADE to process
the simplest taxpayer accounts (1040EZ without problems or balance due).
As we note in the BSM section, CADE is the foundation of IRS's
modernization effort and will ultimately replace the Individual Master
File that currently houses taxpayer data for individual filers. As of
March 16, 2005, CADE has processed over 842,000 tax returns without
significant problems.

Growth in electronic filing (e-filing) helps fund IRS's modernization.
Electronic filing allows IRS to control costs by reducing labor-intensive
processing of paper tax returns. E-filing also improves taxpayer service
by eliminating transcription errors associated with processing paper
returns. E-filing also has benefits for taxpayers, primarily by allowing
them to get their refunds in half the time of paper filers.

As shown in figure 5, the number of e-filed returns has increased since
1999 and the number of paper returns has decreased. The figure also shows
that these changes have allowed IRS to reduce the staff devoted to
processing paper returns between 1999 and 2004 by just over 1,100 staff
years. As the number of e-filed returns has increased, the number of staff
years used to process those returns has not. The decline in paper
processing staff allowed IRS to close its Brookhaven processing center in
2003. In addition, IRS is in the process of closing its paper processing
operation in Memphis.

Figure 5: Number of Individual Returns and IRS Staff Years for Individual
Paper and Electronic Processing, Fiscal Years 1999-2006

Staff years Individual tax returns (in millions)

5,000

120

4,500

100 4,000

3,500 80

3,000

2,500 60

2,000

40 1,500

1,000 20

500

0

0

                   1999 2000 2001 2002 2003 2004 2005a 2006a

Fiscal year

Staff years devoted to electronic filing

Staff years for selected major paper processing activities

Electronic returns processed

Paper returns processed

Source: GAO analysis of IRS data.

* Fiscal years 2005 and 2006 are IRS projections and, given the current
lower e-file growth rates, the estimates may be optimistic.

Note: Staff years and FTEs are units of measurement that are often used
interchangeably. According to IRS, an FTE is the equivalent of one person
working full time for 1 year with no overtime. A staff year includes
overtime. Therefore, the cost of 1 staff year is equal to the cost of one
FTE plus overtime. As noted in the figure, staff years for paper filing
are for selected major activities only.

Although the growth in e-filing is about 6.7 percent over the same period
last year, it is growing at a slower rate than previous years. Based on
the current trend and the fact that the percentage of returns e-filed
traditionally declines as April 15 approaches, it appears that IRS will
not achieve its goal of having 68.2 million individual tax returns e-filed
this year (an 11 percent increase over last year).

Over recent years, IRS has undertaken numerous initiatives to increase
e-filing. However, neither this year's current growth rate nor the
projected annual growth rate will enable IRS to achieve its goal of 80
percent of all

Telephone Access Has Remained Relatively Stable and Accuracy Has Improved

individual tax returns being e-filed in 2007. This goal has focused
attention on increasing e-filing. As we reported last year, IRS officials
believe that achieving the goal would require additional measures to
convert the tens of millions of taxpayers and tax practitioners who
prepare individual income tax returns on a computer, but filed on paper to
e-filing. IRS officials also stated that the additional measures might
need to include legislation that mandates e-filing for certain classes of
returns, such as those prepared by practitioners. Last year we reported
five states, including California, that mandated the e-filing of state tax
returns, also showed increases in the e-filing of federal returns.23 This
year, three additional states have introduced mandatory e-filing of state
returns by tax practitioners.

Between January 1 and March 12, IRS received approximately 23 million
calls. As shown in table 4, IRS's automated service handled nearly 14
million calls and customer service representatives (CSRs) handled just
over 9 million. The percentage of taxpayers who attempted to reach CSRs
and actually got through and received service-referred to as the CSR level
of service-remained relatively stable at 83 percent compared to 84 percent
at the same time last year.

IRS reduced its 2005 goal for CSR level of service from 85 percent in 2004
to 82 percent because of the budget reduction for taxpayer service.
However, IRS has been able to achieve a relatively stable CSR level of
service of 83 percent since last year. According to IRS officials, this
level of performance is due to

     o staff plans being made before the level of service goal was reduced;
     o the agency receiving fewer calls due to fewer tax law changes than in
       2004;
     o the agency improving methods for handling calls; and
     o an increased use of IRS's Web site.

Although CSR level of service is about the same as last year, down one
percentage point, there are other indications of slippage in telephone

23 GAO-05-67.

access. Specifically, taxpayers are waiting longer to speak to a CSR. Wait
times have increased by about 35 seconds or 15 percent compared to the
same period last year. Additionally, the rate at which taxpayers abandon
their calls to IRS increased from 10 percent to 11.5 percent, which
translates into about 99,000 calls. The responsible IRS official considers
the increase in wait time and increase in abandon rate to be acceptable,
in part because IRS data are showing that the agency is using 9 percent
fewer FTEs than last year and answering 195 more calls per FTE.

IRS officials said they lowered the CSR level of service goal in response
to the reduction in the taxpayer service budget, and will adjust staffing
plans after the filing season to address the taxpayer service budget
reduction. IRS officials believe the adjustments will likely result in a
lower level of service than is currently being achieved.

IRS estimates that the accuracy of CSRs' answers to taxpayers' tax law
questions improved compared to last year. Specifically, tax law accuracy
increased to an estimated 87 percent as compared to 76 percent at the same
time last year. This represents a significant change from last year, when
we drew attention to the declining tax law accuracy rate.24 According to
IRS officials and staff, the improvement is primarily due to formatting
changes made in 2004 to the guide that CSRs use to help them answer
taxpayers' tax law questions that have enhanced the usability of the
guide. IRS officials stated that the revised guide is better and more
user-friendly, partly because many of the suggested improvements were from
CSRs who use the guide daily. In addition, IRS officials stated that the
improved tax law accuracy rate reveals that the previous version of the
guide was indeed the reason for last year's decline in tax law accuracy,
and attributed fluctuations in the tax law accuracy rate to changes in the
guide in past years.

IRS estimates that accounts accuracy (the accuracy of answers to questions
from taxpayers about the status of their accounts) has improved compared
to last year and since 2002. Taxpayers who called about their accounts
received correct information an estimated 92 percent of the time, which is
an improvement compared to last year's 89 percent rate and the 88 percent
rate seen in 2002 and 2003. The responsible IRS official told us that
accounts accuracy rates have improved because IRS has improved its

24 GAO-04-560T.

Web Site Performing Well and Used Extensively

ability to monitor and manage staff, expanded training, and improved its
ability to search for account information.

Various data indicate that IRS's Web site is performing well. We found it
to be user-friendly because it was readily accessible and easy to
navigate. Problem areas that we reported in the past, such as the search
function, were much improved this filing season, thus eliminating our
previous concerns about the search function. Furthermore, an independent
weekly study done during the filing season has reported that IRS's Web
site has ranked in the top 4 out of 40 government Web sites and that users
were able to access the IRS Web site in .65 seconds or less. The same
independent weekly assessment reported that IRS ranked first or second in
response time of downloading data. Finally, the electronic tax law
assistance program on IRS's Web site has shown marked improvement this
year over last. For example, the average response time is down from 3.8
days to 1.6 days and the accuracy rate has improved from 56.9 percent to
87.5 percent.25 According to IRS officials, this significant improvement
is due to a decrease in the number of tax law questions being
submitted-down from about 56,000 to 8,700 for the same time period.

IRS's Web site is experiencing extensive usage this filing season based on
the number of visits, pages viewed, and forms and publications downloaded.
As of February 28, 2005, the Web site was visited about 83 million times
by users who viewed about 628 million pages. This is the first time that
IRS has publicly reported the number of visits to and number of pages
viewed on its Web site. Further, about 70.3 million forms and publications
had been downloaded this fiscal year through February, with about 45
million of those downloads occurring in January and February.

IRS's Web site continues to provide two very important tax service
features: (1) "Where's My Refund," which enables taxpayers to check on the
status of their refund and (2) Free File, which provides taxpayers the
ability to file their tax return electronically for free via IRS's Web
site. As of March 20, 2005, about 16 million taxpayers accessed the
"Where's My Refund" feature to check the status of their tax refund-about
a 15 percent

25 These estimates are based on IRS's random samples of electronic tax law
assistance questions submitted via IRS's Web site. These estimates have a
+/- 4.6 percentage points range and +/-2.8 percentage points range in 2004
and 2005 respectively, with a 90 percent confidence level.

Page 31 GAO-05-416T

Use of IRS's Walk-in Assistance Continues to Decline, While Use of
Volunteer Assistance Increases

increase over the same time period last year. Also, IRS provided new
functionality for "Where's My Refund" whereby a taxpayer whose refund
could not be delivered by the Postal Service (i.e., returned as
undeliverable mail), can change their address on the Web site. In
addition, as of March 16, 2005, 3.6 million tax returns had been filed via
Free File, which represents a 44 percent increase over the same time
period last year. In the 2005 filing season, all individual taxpayers are
eligible to file free via IRS's Web site.

As of March 12, assistance provided at IRS's approximately 400 walk-in
sites declined by 11 percent compared to the same time last year, with the
number receiving tax preparation assistance declining by about 22 percent.
Staff at those sites provides taxpayers with information about their tax
accounts and answer a limited scope of tax law questions.26 If staff
cannot answer taxpayers' questions, they are required to refer taxpayers
to IRS's telephone operations or have taxpayers correspond via IRS's Web
site. In combination with decreased demand, IRS reduced the staff used at
walk-in sites for return preparation assistance and continues to encourage
taxpayers to use volunteer sites for return preparation. These declines
are consistent with IRS's goal to further limit return preparation and tax
law assistance at walk-in sites by 2007 and with its 2006 budget request.

26 Walk-in site employees are trained and authorized to only answer tax
law questions on specific tax topics such as those related to income,
filing status, exemptions, deductions, and related credits.

Page 32 GAO-05-416T

Figure 6: Assistance Provided by IRS Walk-in and Volunteer Sites,
2001-2006 Filing Seasons (in millions)

Millions at IRS walk-in sites Millions at volunteer sites

6

                                       6

5

                                       5

4

                                       4

3

                                       3

2

                                       2

1

                                       1

                                     0.20 0

0 2001 2002 2003 2004 2005a 2006a 2001 2002 2003 2004 2005a 2006a

Fiscal year Fiscal year

Return preparation at walk-in sites

Return preparation at volunteer sites

Other walk-in contacts Source: GAO analysis of IRS data.

a Fiscal years 2005 and 2006 are IRS projections.

Note: "Other walk-in contacts" includes assistance for account notices,
tax law inquiries, forms, and compliance work, but not return preparation.
For the walk-in sites, the time periods covered are December 31, 2000,
through April 28, 2001; December 30, 2001, through April 27, 2002;
December 29, 2002, through April 26, 2003; and December 28, 2003, through
April 24, 2004. For volunteer sites, the time period covered for 2001 is
January 1, 2001, through April 21, 2001; all other periods are the same as
those for IRS walk-in sites.

As reflected in table 4 and figure 6, in contrast to IRS walk-in sites,
the number of taxpayers seeking return preparation assistance at volunteer
sites has increased this year and every year since 2001. These sites,
staffed by volunteers certified by IRS, do not offer the range of services
IRS provides, but instead focus on preparing tax returns primarily for
low-income and elderly taxpayers and operate chiefly during the filing
season. IRS officials estimated that the number of taxpayers receiving
assistance at approximately 14,000 volunteer sites has increased over 23
percent compared to the same time last year.

                                  Conclusions

The shift of taxpayers from walk-in to volunteer sites is important,
because it has transferred time-consuming services, particularly return
preparation, from IRS to volunteer sites and allowed IRS to concentrate on
services that only it can provide such as account assistance or compliance
work. As a result, IRS has devoted fewer resources to return preparation.
While this shift is important to IRS, others have been more cautious. For
example, in her January 2005 report,27 the Taxpayer Advocate has expressed
concern about the reduction of face-to-face services, such as those
offered at walk-in sites. She stated that IRS's plan does not adequately
provide for the segment of the population that continues to rely on the
interaction provided by walk-in sites. At the same time, last year, we28
and TIGTA29 called attention to issues related to the quality of service
at both IRS walk-in and volunteer sites. IRS has separate quality
initiatives under way at both IRS walk-in sites and volunteer sites,
although data remain limited and cannot be compared to prior years.

As IRS shifts its priorities to enforcement and faces tight budgets for
service, the agency will be challenged to maintain the gains it has made
in taxpayer service. In order to avoid a "swinging pendulum," where
enforcement gains are achieved at the cost of taxpayer service and vice
versa, IRS and the Congress would benefit from a set of agreed-upon
long-term goals. Long-term goals would provide a framework for assessing
budgetary tradeoffs between taxpayer service and enforcement and whether
IRS is making satisfactory progress towards achieving those goals.
Similarly, long-term goals could help identify priorities within the
taxpayer service and enforcement functions. For example, if the budget for
taxpayer service were to be cut and efficiency gains did not offset the
cut, long-term goals could help guide decisions about whether to make
service cuts across

27 National Taxpayer Advocate, 2004 Annual Report to Congress (Washington,
D.C.: Dec. 31, 2004).

28 GAO, Tax Administration: IRS Improved Performance in the 2004 Filing
Season, but Better Data on the Quality of Some Services Are Needed,
GAO-05-67 (Washington, D.C.: Nov. 4, 2004).

29 Treasury Inspector General for Tax Administration, Improvements Are
Needed to Ensure Tax Returns Are Correctly Prepared at Taxpayer Assistance
Centers, Reference No. 2004-40-025 (Washington, D.C.: 2003) and Treasury
Inspector General for Tax Administration,

Improvements Are Needed to Ensure Tax Returns Are Prepared Correctly at
Internal Revenue Service Volunteer Income Tax Assistance Sites, Reference
No. 2004-40-154 (Washington, D.C.: 2004).

the board or target selected services. To its credit, IRS has been
developing a set of long-term goals, so we are not making a recommendation
on goals. However, we want to underscore the importance of making the
goals public in a timely fashion, as IRS has planned. The Congress would
then have an opportunity to review the goals and start using them as a
tool for holding IRS accountable for performance.

In addition, the Congress would benefit from more information about the
short-term impacts of the 2006 budget request on taxpayers. The 2006
budget request cites a need for reducing the hours of telephone service
and scaling back walk-in assistance but provides little additional detail.
Without more detail about how taxpayers will be affected, it is difficult
to assess whether the 2006 proposed budget would allow IRS to achieve its
stated intent of both maintaining a high level of taxpayer service and
increasing enforcement.

BSM and related initiatives such as electronic filing hold the promise of
delivering further efficiency gains that could offset the need for larger
budget increases to fund taxpayer service and enforcement. Today,
taxpayers have seen payoffs from BSM; however, the program is still high
risk and budget reductions have caused substantive program changes. IRS
has recognized it is time to revisit its long-term BSM strategy and is
currently refocusing the program. As we did with long-term goals above, we
want to underscore the importance of timely completion of the revision of
the BSM strategy.

We recommend that the Commissioner of Internal Revenue supplement the

  Recommendation

2006 budget request with more detailed information on how proposed service
reductions would impact taxpayers.

Appendix I

Description of IRS's Proposed Budget Structure

IRS's proposed new budget structure as depicted in figure 7 combines the
three major appropriations that the agency has had in the past-
Processing, Assistance, and Management; Tax Law Enforcement; and
Information Systems into one appropriation called Tax Administration and
Operations. The Business Systems Modernization and Health Insurance Tax
Credit Administration appropriations accounts remain unchanged. The Tax
Administration and Operations appropriation is divided among eight
critical program areas. These budget activities focus on Assistance,
Outreach, Processing, Examination, Collection, Investigations, Regulatory
Compliance, and Research. According to IRS, as it continues to move
forward with developing and implementing this new structure, these program
areas and the associated resource distributions will be refined to provide
more accurate costing.

IRS reported that the new budget structure has a more direct relationship
to its major program areas and strategic plan. We did not evaluate IRS's
proposed budget structure as part of this engagement because it was not
within the scope of our review. However, we have recently completed a
study on the administration's broader budget restructuring effort. In that
study we say that, going forward, infusing a performance perspective into
budget decisions may only be achieved when the underlying information
becomes more credible and used by all major decision makers. Thus, the
Congress must be considered a partner. In due course, once the goals and
underlying data become more compelling and used by the Congress, budget
restructuring may become a better tool to advance budget and performance
integration.1

1 For a more detailed discussion, see GAO, Performance Budgeting: Efforts
to Restructure Budgets to Better Align Resources with Performance,
GAO-05-117SP (Washington, D.C.: February 2005).

Page 36 GAO-05-416T Appendix I Description of IRS's Proposed Budget
Structure

                   Figure 7: IRS's Proposed Budget Structure

                 Source: GAO representation of IRS information.

Appendix II

BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary

The table below shows the life-cycle variance in cost and schedule
estimates for completed and ongoing Business Systems Modernization (BSM)
projects, based on data contained in IRS's expenditure plans. These
variances are based on a comparison of IRS's initial and revised (as of
July 2004) cost and schedule estimates to complete initial operation1 or
full deployment2 of the projects.

  Table 5: BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary

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

Security and      +$8,450 $45,401   +5 1/31/02       Provides              
Technology                             (initial      infrastructure for    
Infrastructure                         operation)a   secure telephony and  
Release 1                                            electronic            
                                                        interaction among IRS 
                                                        employees, tax        
                                                        practitioners, and    
                                                        taxpayers.            
Customer          +14,562 60,762    +9 2/26/02 (full Improves              
Communications                         deployment)   telecommunications    
2001                                                 infrastructure,       
                                                        including telephone   
                                                        call management, call 
                                                        routing, and customer 
                                                        self-service          
                                                        applications.         
Customer           -721    9,245    +3 9/30/02 (full Provides commercial,  
Relationship                           deployment)   off-the-shelf         
Management Exam                                      software to IRS       
                                                        revenue agents to     
                                                        allow them to         
                                                        accurately compute    
                                                        complex corporate     
                                                        transactions.         
Human Resources    +200   10,200     0 12/31/02      Allows IRS employees  
Connect Release 1                      (initial      to access and manage  
                                          operation)a   their human resources 
                                                        information online.   
Internet Refund/  +12,923 26,432   +14 9/26/03 (full Provides instant      
Fact of Filing                         deployment)   refund status         
                                                        information and       
                                                        instructions for      
                                                        resolving refund      
                                                        problems to taxpayers 
                                                        with Internet access. 
Modernized e-File +21,057 50,303  +6.5 5/31/04       Provides initial      
Release 1                              (initial      electronic filing     
                                          operation)a   capability for large  
                                                        corporations, small   
                                                        business, and         
                                                        tax-exempt            
                                                        organizations.        

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

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

Page 38 GAO-05-416T

 Appendix II BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary

                         (Continued From Previous Page)

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

Modernized              0 16,325    0 9/30/04        Provides additional   
e-File Release 2                      (initial       functionality to      
                                         operation)     support corporate     
                                                        electronic filing and 
                                                        other capabilities,   
                                                        including required    
                                                        public access to      
                                                        filed returns for     
                                                        tax- exempt           
                                                        organizations.        
Modernized        +5,300  27,175    0 3/31/05        Provides additional   
e-File Release 3                      (initial       functionality to      
                                         operation)     support electronic    
                                                        filing for tax-exempt 
                                                        organizations and     
                                                        other capabilities,   
                                                        including the         
                                                        interface with state  
                                                        retrieval systems.    
e-Services       +102,271 148,820 +18 4/30/05 (full  Provides a Web portal 
                                         deployment)    and other e-Services  
                                                        to promote the goal   
                                                        of conducting most    
                                                        IRS transactions with 
                                                        taxpayers and tax     
                                                        practitioners         
                                                        electronically.       
Customer Account +118,129 182,774 +30 6/30/05 (full  Provides the          
Data Engine -                         deployment)    modernized database   
Individual                                           foundation to replace 
Master File                                          the existing          
Release 1                                            individual master     
                                                        file processing       
                                                        systems. Facilitates  
                                                        faster refund         
                                                        processing and more   
                                                        timely response to    
                                                        taxpayer inquiries    
                                                        for Form 1040EZ       
                                                        filers.               
Integrated       +73,710  173,580 +15 6/30/05 (full  Provides a single     
Financial System                      deployment)    general ledger for    
Release 1                                            custodial and         
                                                        financial data and a  
                                                        platform to integrate 
                                                        core financial data   
                                                        with budget,          
                                                        performance, and      
                                                        cost-accounting data. 
Custodial        +91,789  138,950 +33 11/01/05 (full Provides integrated   
Accounting                            deployment)    tax operations and    
Project Release                                      internal management   
1                                                    information to        
                                                        support evolving      
                                                        decision analytics,   
                                                        performance           
                                                        measurement, and      
                                                        management            
                                                        information needs.    

Source: GAO analysis of IRS data.

aInformation on the costs and schedule for the full-deployment stage of
these projects was not available in the BSM expenditure plans.

Appendix III

How IRS Allocated Expenditures and Full-Time Equivalents in Fiscal Year
2004

Figures 8 and 9 illustrate how the Internal Revenue Service (IRS)
allocated expenditures and full-time equivalents (FTE) in fiscal year
2004. Figure 8 shows total expenditures. The percentage of expenditures
devoted to contracts decreased from 9 percent in 2002 to 5 percent in
2004, because of fewer private contracts. The percentage of expenditures
devoted to other nonlabor costs increased from 8 percent in 2002 to 12
percent in 2004, due to increases in miscellaneous costs.

                 Figure 8: IRS Expenditures in Fiscal Year 2004

Communications and utilities $.37 billion

Contracts $.54 billion

Equipment $.54 billion

Total expenditures Rent

$10.7 billion

$.67 billion

Other nonlabor costs $1.31 billion

Labor $7.2 billion

Source: GAO analysis of IRS data.

Note: Numbers do not add to the total and percentages do not add to 100
percent due to rounding.

Figure 9 shows IRS's total FTEs. FTEs have decreased slightly from 99,180
in 2002 to 99,055 in 2004. We previously reported that processing FTEs
declined 1 percentage point between 2002 and 2003. Between 2003 and 2004,
IRS's allocation of FTEs remained similar with a 1 percentage point
increase in conducting examinations, and in management and other services.

Appendix III
How IRS Allocated Expenditures and Full- Time Equivalents in Fiscal Year
2004
: How IRS Spent 99,055 FTEs in Fiscal Year 2004

Source: GAO analysis of IRS data.

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