-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO/T-GGD/AIMD-00-133	

TITLE:     Tax Administration: IRS' 2000 Tax Filing Season and 
Fiscal Year 2001 Budget Request

DATE:   03/28/2000 
				                                                                         
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GAO/T-GGD/AIMD-00-133

TAX ADMINISTRATION IRS' 2000 Tax Filing Season and Fiscal Year 2001 Budget
Request

Statement of James R. White, Director Tax Policy and Administration Issues
General Government Division

United States General Accounting Office

GAO Testimony Before the Subcommittee on Oversight, Committee on

Ways and Means, House of Representatives

For Release on Delivery Expected at 2: 00 p. m. EST on Tuesday March 28,
2000

GAO/ T- GGD/ AIMD- 00- 133

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 1 GAO/ T- GGD/ AIMD- 00- 133

Mr. Chairman and Members of the Subcommittee: We are pleased to participate
in the Subcommittee's inquiry into the status of the 2000 tax filing season
and the fiscal year 2001 budget request for the Internal Revenue Service
(IRS).

Our statement is based on (1) the preliminary results of our review of the
2000 tax filing season; (2) our review of IRS' fiscal year 2001 budget
request and supporting documentation; and (3) past and ongoing reviews of
various IRS activities, including those related to information systems and
IRS' reorganization. Much of our analysis is based on data provided by IRS
that we did not verify. However, those data generally came from management
information systems that we have used in the past to assess IRS operations.

With respect to the 2000 filing season, our statement makes the following
points:

ï¿½ IRS made several important changes to its tax processing systems before
the 2000 filing season, and those systems have operated without significant
problems. Various data sources indicate that the systems are actually
performing better than in 1999.

ï¿½ The use of electronic filing continues to grow, which is partly
attributable to various IRS initiatives to make electronic filing paperless
and to better promote the program.

ï¿½ Compared to last year, when IRS experienced serious problems, telephone
service has improved, but it has yet to reach the level of service achieved
in 1998. IRS officials cited two factors that have likely played a part in
keeping the level of service below the 1998 level- a drop in productivity
compared to 1998 and fewer staff dedicated to answer telephone calls.

IRS is requesting about $8.986 billion for fiscal year 2001, an increase of
about $729. 8 million, or 9 percent, over IRS' proposed operating level for
fiscal year 2000. IRS is also requesting (1) a supplemental appropriation of
$39.8 million for fiscal year 2000, which is included in the proposed
operating level for that year, and (2) an advance appropriation for fiscal
year 2002 for its multiyear capital account. With respect to those requests,
our statement makes the following points:

ï¿½ The supplemental appropriation and a significant part of the increase for
fiscal year 2001 is for an initiative that would increase staffing levels in
several of IRS' program areas and which has budget implications for future
years. While many aspects of the initiative seem appropriate, we are most

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 2 GAO/ T- GGD/ AIMD- 00- 133

concerned about (1) IRS' ability to implement the initiative given its past
history of being unable to fill enforcement positions funded by Congress and
(2) that part of the initiative that would increase staffing for IRS'
tollfree telephone assistance program. Congress should consider withholding
approval of the requested increase for telephone service until IRS provides
a more realistic estimate of the level of service it can expect to provide
in fiscal year 2001.

ï¿½ IRS' request includes $1.58 billion for its Information Systems
appropriation and $494 million for its multiyear capital account, $375
million of which would be an advance appropriation for fiscal year 2002.
Because the $494 million request is not adequately justified, Congress
should consider denying the request and directing IRS to develop a credible
and verifiable fiscal year 2001 budget request for the capital account that
it can use in seeking, if necessary, a supplemental appropriation.

ï¿½ IRS' includes $182 million to cover expenses associated with its
reorganization. Over the past year, IRS has developed detailed designs,
selected management officials, and put in place management structures for
several of its new operating units. IRS plans indicate that reorganization
costs will peak in fiscal year 2001 and end in fiscal year 2003. Other costs
associated with IRS' modernization, such as the costs of training and
systems modernization, should continue well past 2003.

ï¿½ IRS' budget request does not provide clear links between the resources
being requested and expected results. We recognize that establishing such
links is difficult and that agencies throughout the federal government are
struggling with the same issue. As IRS proceeds with its reorganization and
its efforts to develop new performance measures, it has an opportunity to
make future budget requests more useful to Congress.

At the Subcommittee's request, we are reviewing IRS' performance during the
2000 tax filing season. Our testimony focuses on three specific issues- the
performance of IRS' processing systems and IRS' efforts to increase
electronic filing and improve telephone service. Our preliminary results
show that (1) computer systems for processing returns and remittances appear
to be working well; (2) the number of individual income tax returns filed
electronically has continued to increase; and (3) taxpayers have been better
able to reach IRS by telephone than they were last year, although service
has not yet reached the level IRS attained in 1998. Preliminary Data on

the 2000 Filing Season

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 3 GAO/ T- GGD/ AIMD- 00- 133

Despite the potential for complications due to the replacement of critical
equipment, consolidation of operations, and other Year 2000- related
changes, IRS' tax processing systems have operated without any significant
disruption of IRS' ability to process returns and issue refunds. In fact,
various IRS performance measures and comments from IRS officials and a
representative of the largest tax return preparation company indicate that
IRS' tax processing systems have been performing better this year than in
1999. For example, as of March 10, 2000, the processing time for paper
returns was at least 14 percent faster than at the same time last year.
Also, according to IRS data as of that same date, IRS had experienced fewer
system problems that caused work stoppages than in 1999 and was able to
resolve these types of problems in less time than it took in 1999. According
to the Commissioner of Internal Revenue, IRS' “smooth transition to
Year 2000 can be directly attributed to our thorough planning and
preparation.”

In the last few years, IRS has been involved in three major system- related
efforts that affect the processing of returns and remittances: (1) replacing
service center return and remittance processing equipment, (2) consolidating
the tax processing computer operations of IRS' 10 service centers to 2
computing centers, and (3) rewriting applications software to make systems
Year 2000 compliant. The equipment replacement project was completed before
the start of the 2000 filing season. The consolidation project is ongoing-
five centers were consolidated before the start of the 2000 filing season,
and the other five are scheduled for consolidation by the end of this year.
IRS' efforts to make its computer systems Year 2000 compliant were also
substantially completed before the start of the 2000 filing season.

For the past several years, IRS has been processing returns and remittances
without any significant problems. However, considering the volume of tax
returns and remittances that IRS has to process during a filing season and
the need for IRS to annually reprogram its systems to accommodate tax law
changes, some “glitches” are to be expected. In that regard, IRS
has experienced some relatively minor problems this filing season. According
to IRS, those problems affected a relatively small number of taxpayers, and
prompt action was taken to address the problems once they were identified.
For example:

ï¿½ IRS reported that in the first week of January 2000, it issued about 440
balance due notices with erroneous due dates. The notices were sent to
taxpayers owing more than $100,000 and account for less than 1 percent of
Tax Processing Systems

Have Operated Without Significant Problems

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 4 GAO/ T- GGD/ AIMD- 00- 133

the balance due notices issued during that week. According to IRS, it
contacted all affected taxpayers and provided the correct payment dates.

ï¿½ IRS' electronic filing system improperly rejected about 40,000 individual
returns that claimed a child care credit or reported dependent care benefits
from an employer. According to IRS officials, the problem began in mid-
January and was corrected by February 10, 2000. According to a
representative of the largest national tax return preparation company, most
taxpayers filing through his company opted to resubmit their electronic
return after IRS corrected the problem rather than submit a paper return.
According to the representative, the problem resulted in only minor delays
in taxpayers receiving their refunds.

ï¿½ IRS' systems could not identify taxpayer accounts that were affected by a
power of attorney designation. As a result, a few hundred refunds that
should have been mailed to the third party were mailed directly to the
taxpayer, and at least 81,000 notices or letters were delayed in being sent
to third party representatives. In the event the notices related to unpaid
tax liabilities and those tax liabilities are not paid on time, IRS may need
to abate certain penalties and interest because of the error. According to
IRS, it has corrected the system- related errors to avoid further problems.

Pursuant to a provision in the IRS Restructuring and Reform Act of 1998
(RRA98), IRS has as its goal that 80 percent of all tax and information
returns be filed electronically by 2007. Electronic filing has several
advantages for taxpayers and IRS. For example, IRS acknowledges receipt of
an electronic return, electronic filers receive their refunds faster,
upfront checks in the electronic filing system help to ensure more accurate
returns and thus reduce the number of taxpayer errors that IRS has to
correct, and returns filed electronically bypass the error- prone manual
procedures that IRS uses to process paper returns.

For the past several years, we have been tracking IRS' progress in getting
individual income tax returns filed electronically. As noted in our report
on the 1999 filing season, the number of electronically- filed individual
income tax returns increased substantially between 1997 and 1999. 1 As shown
in table 1, that upward trend is continuing.

1 Tax Administration: IRS' 1999 Tax Filing Season (GAO/ GGD- 00- 37, Dec.
15, 1999). Use of Electronic Filing

Continues an Upward Trend

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 5 GAO/ T- GGD/ AIMD- 00- 133

Filing type 1/ 1/ 98 to 3/ 13/ 98 1/ 1/ 99 to

3/ 12/ 99 Percent

change: 1998 to 1999 1/ 1/ 00 to

3/ 10/ 00 Percent

change: 1999 to 2000

Paper 31,936 30,168 -5.5% 27,817 -7.8% Electronic Traditional a 13,649
15,853 16.1 18,404 16.1 On- line b 550 1,431 160.2 2,800 95.7 TeleFile c
4,598 4,353 -5.3 3,911 -10.2

Subtotal 18,797 21,637 15.1 25,115 16.1 Total 50,733 51,805 2.1% 52,932 2.2%

a Traditional electronic filing involves the transmission of returns over
communication lines through a third party, such as a tax return preparer or
electronic return transmitter, to an IRS service center. b On- line returns
are prepared and transmitted by the taxpayer through an on- line
intermediary using a

personal computer and commercial software. c Under TeleFile, certain
taxpayers who are eligible to file a Form 1040EZ are allowed to file using a

toll- free number on touch- tone telephones. Officials in IRS' Office of
Electronic Tax Administration suggested that TeleFile use is down over the
last 2 years because taxpayers who could have used TeleFile might have
switched to on- line filing.

Source: IRS' Management Information System for Top Level Executives.

To encourage taxpayers to file electronically this filing season, IRS has,
among other things, (1) expanded tests aimed at making electronic filing
paperless, (2) allocated $7 million to promote electronic filing, and (3)
increased the types of forms that can be filed electronically.

A major criticism of the electronic filing program has been that it is not
paperless- electronic filers had to send IRS a paper signature document
(Form 8453) and, if they owed money, a check and payment voucher. According
to IRS, feedback from the tax practitioner community indicated that making
electronic filing paperless would significantly increase taxpayers' and tax
preparers' willingness to file electronically.

IRS, in 1999, implemented two tests that provide alternatives to paper
signature documents and two tests that provide electronic payment
alternatives for taxpayers who owe money. For the 2000 filing season, IRS
expanded each of those tests.

The two alternative signature tests waive the need for participating
taxpayers to submit paper signature documents and copies of their Wage and
Tax Statements (Forms W- 2). 2 The first test allows certain tax

2 These tests are consistent with a provision in RRA98, which required that
IRS “develop procedures for the acceptance of signatures in digital or
other electronic form” and that further authorized IRS to waive the
requirement of a signature or provide for alternative methods of signing
until such time as such procedures are in place. According to a cognizant
IRS official, IRS can waive the submission of W2s because there is no
statutory requirement that these forms be attached to tax returns.

Table 1: Individual Income Tax Returns Received by IRS (in Thousands)

Efforts to Increase Electronic Filing

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 6 GAO/ T- GGD/ AIMD- 00- 133

practitioners' clients who choose to file electronically to use a self-
selected personal identification number instead of completing a signature
document. IRS data show that about 500,000 taxpayers used this option in
1999. IRS increased the number of practitioners allowed to participate in
the test from 8,100 in 1999 to 18,000 this year. IRS data show that about
3.95 million taxpayers had already used this option as of March 9, 2000- a
significant increase over last year.

The second alternative signature test involves taxpayers who used tax
preparation software to prepare their previous year's tax return. Instead of
sending those taxpayers a paper tax package, IRS sends them a postcard with
a unique customer number that they can use in lieu of mailing in a signature
document, if they decide to again file through their computer. About 660,000
taxpayers used this option in 1999. IRS increased the number of taxpayers
who could participate in the test from about 12 million in 1999 to about 16
million this year. According to IRS, about 778,000 taxpayers had used this
option as of March 9, 2000.

IRS also expanded two tests involving alternative payment methods for
taxpayers who owe money, both of which eliminate the need for taxpayers to
send checks and payment vouchers. One test, involving the use of credit
cards, was expanded to taxpayers who file Estimated Tax Payments (Form
1040ES) or an Extension of Time to File (Form 4868). IRS also did more to
publicize this option's availability to paper filers. The other test,
involving payments via direct debit, was expanded to include TeleFile users.
As of March 10, 2000, according to IRS, 28,200 taxpayers had used one of
these two payment alternatives, compared to 7,286 at the same time last
year. Of those 28,200 taxpayers, 20,697 were electronic filers who paid by
direct debit (including 6,367 TeleFilers) and 7,503 were an unknown
combination of electronic and paper filers who used credit cards.

Another effort to increase electronic filing this year involved additional
marketing of the electronic filing program. IRS allocated $7 million to
market individual electronic filing for the 2000 filing season, compared to
$5 million for 1999. This year's marketing effort includes expanded
television and radio advertising, advertising in several magazines and
newspapers, and the use of outdoor billboards. IRS officials from a regional
office we visited told us that many more taxpayers have been coming into IRS
walk- in sites to have their returns filed electronically, which the
officials attributed, at least in part, to the increased marketing.

IRS also added five forms to the list of forms that can be filed
electronically this year. Practitioner feedback to IRS indicated that

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 7 GAO/ T- GGD/ AIMD- 00- 133

providing the ability to electronically file additional forms, such as those
used for averaging farm income or reporting passive activity gains, would
allow practitioners to file more electronic returns because they had clients
who were required to file those forms with their returns. IRS estimated that
about 250,000 of these types of forms would be filed electronically in the
2000 filing season. As of March 16, 2000, about 9, 800 had been filed.

An important indicator of how well the filing season is going is the ease
with which taxpayers can reach IRS over the telephone to ask questions about
the tax law or respond to a notice they received. 3 In the few years before
1999, there had been a steady improvement in this indicator. That trend
ended in 1999, when IRS experienced problems that significantly reduced
taxpayers' ability to reach IRS by telephone. IRS addressed some of the
problems that contributed to the service problems in 1999 and, as shown in
table 2, service has improved this year. However, the level of service as of
March 7, 2000, was still below the level achieved in 1998 partly because,
according to IRS officials, the productivity of telephone assistors has
declined compared to 1998 and fewer staff years have been dedicated to
answering the telephone in 2000.

Telephone service 1/ 1/ 00 to 3/ 4/ 00 1/ 1/ 99 to

3/ 6/ 99 1/ 1/ 98 to 3/ 7/ 98

(a) Calls answered 13.4 14.7 16.3 (b) Calls abandoned 3.9 4.6 3.8

(c) Subtotal- calls that got into IRS' system 17.4 19.3 20.2

(d) Busy signals 4.1 14.8 2.2

(e) Total call attempts 21.4 34.1 22.3

Level of service a 63% 43% 73% Percentage of calls that received busy
signals b 19% 44% 10% Percentage of calls that got into IRS' system but were
abandoned c 23% 24% 19%

Note 1: This table combines data on three of IRS' toll- free telephone
lines-- tax law assistance, account inquiry, and refund.

Note 2: Totals may not add and percentages may not compute due to rounding.
a Level of service is the number of calls answered divided by the total call
attempts- computed in this

table by dividing row (a) by row (e). b Computed in this table by dividing
row (d) by row (e).

c Computed in this table by dividing row (b) by row (c). Source: GAO
analysis of data in IRS' Weekly Customer Service Report.

3 An equally important indicator is the quality of the response taxpayers
get to their questions once they reach IRS. We had not done enough work at
the time this statement was prepared to comment on IRS' performance in that
respect. Telephone Service Shows

Some Improvement But Is Still Below 1998 Performance Level

Table 2: Toll- Free Telephone Level of Service for the First 2 Months of the
2000, 1999, and 1998 Filing Seasons (in Millions)

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 8 GAO/ T- GGD/ AIMD- 00- 133

The 63- percent level of service IRS had achieved as of March 4, 2000, was a
significant increase compared to the 43- percent level of service achieved
as of the same time last year. According to a cognizant IRS official, unlike
last year when IRS faced many problems that affected access, there has been
only one major problem this year that had a significant impact on the
telephone system. In late January 2000, contract delays resulted in the bulk
of over 1 million notices being mailed out over a 2- week period instead of
being staggered over 7 weeks as intended. As taxpayers received the notices,
there was an unexpected increase in the number of telephone calls that IRS
was unprepared to answer. According to the official, the level of service
decreased over about a 3- week period as a result of this unexpected demand,
but then increased back to levels achieved before the erroneous mailing. In
that regard, according to IRS data, the level of service was 67 percent for
the week ended January 22, dropped to 44 and 48 percent the following 2
weeks, then rose to 66 percent the week ended February 12. For the most
recent week for which data were available when we prepared this statement
(the week ended March 4, 2000), the level of service had risen to 72
percent. 4

As noted in our report on the 1999 filing season, despite several changes
IRS made to improve its toll- free telephone operations, service actually
declined in 1999. 5 For the 2000 filing season, IRS has addressed some of
the problems that contributed to that decrease; however, issues surrounding
declining productivity and optimal staffing levels have not yet been
resolved.

Before 1999, IRS used a messaging system to handle calls from taxpayers with
questions on certain complex topics that were known to usually require long
conversations. Taxpayers were asked to leave their name and telephone number
with the expectation that someone in IRS would return their call within 2 to
3 days. Because of an expected increase in the productivity of its telephone
assistors in 1999, IRS believed that it could answer all calls, even the
more complex ones, as they came in. Thus, at the start of the 1999 filing
season, IRS discontinued use of the messaging system. IRS subsequently
reinstated the system when it realized that its expectations of increased
productivity had not materialized and that the system's discontinuance had a
negative effect on telephone access.

4 According to IRS, at the “best in class” private sector
companies, 85 percent of callers are connected to an assistor within 30
seconds. 5 GAO/ GGD- 00- 37. IRS Addressed Some of the

Problems That Contributed to Poor Telephone Service in 1999

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 9 GAO/ T- GGD/ AIMD- 00- 133

IRS is continuing to use a messaging system this filing season. However, it
modified the messaging procedure to improve management of the message
workload. Now, instead of being routed to a voice messaging system, calls
involving certain complex topics are routed to an assistor who adds the
taxpayer's name, phone number, and question to a centralized database. IRS
compliance staff nationwide can then access the database and return the
taxpayer's call to answer the question.

Inadequate staffing plans and work schedules for IRS' 24 call sites also
contributed to the reduced level of telephone service in 1999. Those plans
and schedules were created using faulty productivity assumptions and demand
data and were not completed until just before the start of the 1999 filing
season. According to cognizant officials, IRS improved the timeliness and
accuracy of its work schedules this year, allowing them more time for
planning and providing the ability to better match staffing at sites with
call volumes.

Because it assumed that it would have adequate staffing for the 1999 filing
season, IRS initially decided not to use a feature of the telephone system,
known as selected expanded access (SEA), that gives taxpayers access to
automated services when they would have otherwise received a busy signal
because of high call volume. If the service the taxpayer desires is not
available through automation, the only option is to hang up and call back
later. In response to high levels of busy signals and resulting low
accessibility in the early part of the 1999 filing season, IRS began using
SEA in early February 1999. This year, IRS has used SEA from the start of
the filing season. IRS' use of SEA is most likely reflected in the reduction
of about 10.7 million busy signals during the first 2 months of the 2000
filing season compared to the same period in 1999. What is not clear is to
what extent the automated information satisfactorily answers the taxpayer's
question. We will be following up on taxpayer use of SEA as we continue our
review of the filing season.

Although the 63- percent level of service as of March 4, 2000, was a
significant increase over the 43- percent rate achieved as of the same time
last filing season, it was still about 10 percentage points lower than in
1998. IRS officials cited two factors that have likely played a part in
keeping the level of service below the 1998 level- a drop in productivity
compared to 1998 and fewer staff dedicated to answer telephone calls.

According to IRS officials, productivity- the rate at which assistors answer
telephone calls- is down considerably from 1998. Although they speculate
that some of the decline may be due to their emphasis on Decline in
Productivity and

Fewer Staff May Be Keeping Telephone Service Below 1998 Levels

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 10 GAO/ T- GGD/ AIMD- 00- 133

assistors taking as long as necessary to fully resolve a taxpayer's question
or problem, IRS does not conclusively know what factors have contributed to
the productivity decline and whether this has resulted in better or worse
service. IRS has undertaken two studies to determine the reasons for
declining productivity and what, if any, corrective action should be taken.
We will monitor the results of those two studies as we continue our review.

Another factor that may be keeping level of service during this filing
season from reaching the level achieved in 1998 is the decision to reduce
the staff dedicated to providing toll- free telephone assistance. For fiscal
year 2000, IRS allocated fewer positions to provide telephone service and
shifted the remaining positions to non- telephone work, such as responding
to taxpayer correspondence and contacting taxpayers who owe taxes. Cognizant
officials said that when a disproportionate number of staff are diverted to
any one type of service, the other services suffer with large and aged
inventories. They added that the resources and demand for telephone and
correspondence assistance are highly interrelated because taxpayers who have
not received a timely response to their correspondence call IRS, thus
increasing telephone demand.

For fiscal year 2001, IRS is requesting $8. 986 billion and 100,133 full-
time equivalent (FTE) positions, including $145 million and 2,082 FTEs to be
funded outside the discretionary spending caps for the Earned Income Tax
Credit compliance initiative. 6 As shown in appendixes I and II, that
request is about 9 percent more than IRS' proposed operating level for
fiscal year 2000 ($ 8.256 billion) and is the net result of several
increases and decreases, including increases for (1) an initiative called
“Staffing Tax Administration for Balance and Equity” (STABLE),
(2) information systems and technology investments, and (3) organizational
modernization. 7

In analyzing the request for STABLE, it became apparent that several
portions of IRS' request do not contain clear links between the resources
being requested and expected results. Given IRS' ongoing reorganization and
its efforts to develop new or revised performance measures, we

6 Fiscal year 2001 will be the fourth year of funding for this 5- year
initiative. 7 In our report on IRS' fiscal year 1999 financial statements,
Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/ AIMD- 00-
76, Feb. 29, 2000), we discussed certain issues related to IRS' budget, such
as concerns about IRS's ability to ensure compliance with the laws governing
its use of budget authority and IRS' controls over property and equipment.
We are not discussing those issues in this testimony. IRS' Fiscal Year 2001

Budget Request

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 11 GAO/ T- GGD/ AIMD- 00- 133

believe that IRS has an opportunity to make future budget requests more
useful to Congress.

IRS is requesting $144 million and 1,633 additional FTEs to stabilize and
strengthen tax compliance and customer service programs in fiscal year 2001.
IRS has also proposed a supplemental fiscal year 2000 appropriation of $39.8
million for this initiative, collectively known as STABLE, to allow it to
hire some of the new staff in fiscal year 2000. According to IRS, approval
of the supplemental appropriation would allow IRS to train those new hires
in fiscal year 2000, thus maximizing their impact in fiscal year 2001.

As shown in table 3, the STABLE initiative includes staffing increases for
several IRS program areas.

FTEs Budget activity

Fiscal year 2000 supplemental

Fiscal year 2001 annualization

Fiscal year 2001 initiative Total

Submission Processing 50 150 208 408

Telephone and Correspondence Toll Free 63 189 248 500

Automated Collection System 75 225 150 450

Document Matching Underreporter 40 120 40 200

Combined Annual Wage Reporting 10 30 64 104

Examination 11 33 778 822

Collection Field Collection 0 0 50 50

Walk- In 48 142 43 233

Tax Exempt and Government Entities 4 12 52 68 Total FTEs 301 901 1,633 2,835

Note: The FTEs shown in the column headed “Fiscal year 2000
supplemental” reflect IRS' assumption that the persons hired under the
supplemental appropriation will be coming on board around July 1, 2000, and
thus will be working for only 3 months of the fiscal year. Thus, for
example, the 50 FTEs for Submission Processing in that column represent 200
persons working for 3 months in fiscal year 2000. Because those 200 persons
would be expected to work a full year in 2001, the number of FTEs needed
that year would be 200- or 150 more than provided for in the fiscal year
2000 supplemental. That 150 increase is reflected in the column headed
“Fiscal year 2001 annualization.” The same rationale applies to
the other numbers in that column.

Source: IRS' Fiscal Year 2001 Congressional Justification.

Before discussing specific parts of this initiative, we have two overall
comments. IRS Requests Funds to

Stabilize Its Workforce

Table 3: FTEs Requested for STABLE Initiative

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 12 GAO/ T- GGD/ AIMD- 00- 133

ï¿½ Because IRS' request for fiscal year 2001 assumes that many of the new
staff will not be brought on board until April 1, 2001, the number of FTEs
associated with STABLE in fiscal year 2001 reflects the fact that many of
the new staff will not be working the entire fiscal year. Because they will
be working full time the following year, the number of FTEs associated with
STABLE will increase to 4, 003 in fiscal year 2002, according to IRS. Thus,
if Congress funds the initiative and IRS implements it as intended, IRS can
be expected to seek a further increase in fiscal year 2002 to fund the
additional staffing costs associated with this growth in FTEs.

ï¿½ However, there is ample precedent to question whether IRS will be able to
implement STABLE as intended. Many times in the past, IRS has not filled
enforcement positions that were funded by Congress because shortfalls in
other areas caused IRS to use those funds elsewhere. In that regard, IRS'
budget justification says that, for fiscal year 2000, it has had to
“adjust projected spending on personnel, operational support, and
other support costs,” which “required that we not fill 2, 339
FTE devoted to tax law enforcement in the [fiscal year] 2000 President's
Budget.”

In responding to our second overall comment, IRS' Budget Office said the
following:

“We agree that for the past few years we have had to divert labor
resources to fund unfunded mandatory items such as telecommunications and
contracts, as well as reduce the number of FTE due to an unfunded labor
shortfall. This could happen again if we do not receive our full [fiscal
year] 2001 budget request. However, as currently submitted, our [fiscal
year] 2001 budget is balanced and will allow us to fund all requested FTE.
If fully funded we expect to be able to recruit and fill all of the
requested positions.”

The rest of our discussion of STABLE focuses on those elements related to
(1) telephone service, (2) submission processing (3) examination, (4)
collection, and (5) the underreporter program.

STABLE includes 500 additional FTEs for IRS' toll- free telephone service.
With the additional staffing, according to the budget request, IRS plans to
provide a 60- percent level of service for toll- free assistance in fiscal
year 2001 and reduce its dependence on revenue agent detailees from
Examination.

Of the 500 FTEs being requested for toll- free telephone service, 200 will
be used to free Examination staff from having to support customer service
activities. In effect, IRS will be hiring Customer Service staff to replace
Examination staff who have been detailed to answer the phone. Since the net
effect of those 200 FTEs is not to increase the resources available to
answer the telephone but rather to increase the resources available to do
Telephone Service

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 13 GAO/ T- GGD/ AIMD- 00- 133

examinations, we will discuss that part of the request in the next section.
The other 300 FTEs would actually increase the number of resources devoted
to answering the telephone.

Although we asked IRS for documentation further justifying this proposed
staffing increase, IRS did not provide sufficient detail on how it
determined the size of the staff increase or how such an increase would
affect service. In addition, IRS cannot project the level of service it can
expect from its current staffing, much less the level of service it can
expect from more staff. In that regard, IRS has shown that it may be able to
provide better service with even fewer staff than before. As we discussed
earlier, the level of service during the current filing season has improved
significantly over last year- 63 percent as of March 4, 2000, compared to 43
percent at the same time in 1999- even though IRS allocated fewer staff to
toll- free service this year.

Although we agree that IRS needs to improve its toll- free telephone
service, we do not believe that IRS has provided adequate justification for
increasing the number of FTEs devoted to that service. Although IRS' stated
goal (a 60- percent level of service) may have seemed reasonable at the time
the fiscal year 2001 budget was prepared, it appears clear, based on the
preliminary results of this year's filing season, that IRS does not need
additional staff to achieve that level of service.

We believe that Congress should consider withholding approval of this part
of the STABLE request until IRS provides a revised estimate of the level of
telephone service it can expect to provide in fiscal year 2001 with the
increased staffing and clearly demonstrates that the revised estimate
considers (1) the service level achieved this filing season, (2) reasonable
expectations for further improvements in management and processes, and (3)
any planned technological changes.

The STABLE initiative includes 408 additional FTEs that IRS says will be
used to transcribe data from 18 million Schedules K- 1 filed on paper. 8
According to IRS, these paper schedules, together with those filed
electronically, represent in excess of $500 billion in total income. IRS
says that processing of these documents will allow IRS, as part of its
document matching program, to reconcile K- 1 data with information reported
on individual tax returns.

8 Schedules K- 1 provide information on income (or losses) distributed by
business entities to individual partners, beneficiaries, and shareholders.
Matter for Consideration by

Congress Submission Processing

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 14 GAO/ T- GGD/ AIMD- 00- 133

IRS' plan is consistent with a recommendation we made in 1995- namely that
IRS devise ways to enter all Schedules K- 1 onto the computer so they can be
used in the document matching program and for other compliance programs. 9
We presented cost/ benefit information in the report and said that IRS could
reduce the cost of transcribing this information if it could encourage more
partnerships to file the schedules electronically. At that time, only 1.7
million of the total 17.3 million K- 1s were filed electronically. IRS has
made progress in that regard- about 4 million are now processed
electronically and IRS is projecting about 11 million by 2001.

It should be noted that the transcription of K- 1 data starting in fiscal
year 2001 could significantly increase IRS' document matching workload
starting in fiscal year 2002. It remains to be seen what IRS is able to do
with that increased workload since, as discussed later, IRS is currently
unable to investigate many of the discrepancies identified by its document
matching program. Thus, the increased matching workload resulting from the
processing of K- 1 data could affect IRS' budget request for fiscal year
2002.

STABLE would increase Examination staffing in two ways. First, as discussed
earlier, the telephone service portion of STABLE includes 200 FTEs to free
up Examination staff who have been detailed in the past to help the Customer
Service function answer taxpayers' questions. Second, the Examination
portion of STABLE includes 822 FTEs, which would allow IRS to hire
additional staff for the Examination function. IRS says that the staffing
increase will lead to an increase in audit coverage for highincome
individuals (those with taxable income of more than $100,000) from 0.76
percent to 1.10 percent. We have no way of knowing what an appropriate level
of audit coverage would be. Assuming 1.10 percent is a reasonable goal, the
question becomes whether IRS needs additional staff to achieve that goal or
whether it can be achieved by using existing resources more efficiently.

Because there was insufficient information in IRS' budget justification to
address that question, we obtained additional data from IRS. The data we
received showed that

ï¿½ the number of revenue agent FTEs has declined by about 17 percent between
fiscal year 1995 and fiscal year 1999, with a further decline of 4 percent
expected in fiscal year 2000;

9 Tax Administration: IRS' Partnership Compliance Activities (GAO/ GGD- 95-
151, June 16, 1995). Examination

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 15 GAO/ T- GGD/ AIMD- 00- 133

ï¿½ between fiscal years 1995 and 1999, the number of returns filed by
highincome individuals and corporations (the type of returns generally
audited by revenue agents) increased by about 36 percent;

ï¿½ primarily because of an increase in the amount of FTEs spent in training
and helping Customer Service, the percent of revenue agent FTEs spent doing
examinations (known as direct examination time) decreased from 53.9 percent
in fiscal year 1997 to 45. 2 percent in fiscal year 1999; and

ï¿½ time spent per examination case has increased due to such factors as (1)
changes in the mix of work; (2) the learning curve associated with new
laptop computers; (3) the stops and starts associated with details to
Customer Service; and (4) various new documentation, taxpayer notification,
and other requirements associated with implementation of RRA98.

Although direct examination time and time per case could improve as details
to Customer Service become less necessary and staff become more familiar
with the provisions of RRA98 and although other increases in efficiency are
surely possible, we find it hard to argue against increasing Examination
staff in light of the 21- percent decline in revenue agent staffing since
fiscal year 1995 while the number of filed returns in categories audited by
revenue agents has been increasing at an even greater rate.

STABLE includes 283 additional FTEs for IRS' Collection activity- 50 for the
Field Collection function and 233 for the walk- in program. According to
IRS, much of this initiative is designed to address (1) declining staffing
levels among revenue officers, (2) a downward trend in collection case
closures, and (3) substantial increases in the time required per case due to
provisions of RRA98.

IRS' budget request did not contain details on the downward trends in
revenue officer staffing and case closures or the upward trend in case
times. We pursued those issues with IRS and obtained the following
information:

ï¿½ Revenue officer FTEs declined from about 8,130 in fiscal year 1995 to
about 6,480 in fiscal year 1999- a drop of 20 percent- and have continued to
decline this year.

ï¿½ The number of tax delinquent accounts and tax delinquency investigations
closed by the Field Collection function decreased by 30 percent and 49
percent, respectively, between fiscal years 1997 and 1999.

ï¿½ The Collection function is expected to spend about 1,400 FTEs in fiscal
year 2001 administering various provisions of RRA98, which, according to
Collection

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 16 GAO/ T- GGD/ AIMD- 00- 133

IRS, more than offsets the productivity gains associated with the recently
completed national roll- out of the Integrated Collection System.

In addition to the decline in overall staffing levels, some revenue officer
FTEs have been used to provide assistance at IRS walk- in sites. According
to data obtained from IRS, the number of revenue officer FTEs devoted to
that effort increased from 289 in fiscal year 1998 to 542 in fiscal year
1999. According to IRS, of the 233 FTEs being requested for the walk- in
program under STABLE, 200 are intended to allow IRS to reduce this reliance
on revenue officer help. We agree in principle with the desirability of
replacing revenue officer detailees with persons hired and trained
specifically to provide customer service. Doing so should not only allow the
revenue officers to concentrate on collection case work but also improve
customer service. A person who has been hired and trained for a customer
service position should be able to better assist taxpayers than a person who
has been hired and trained to collect taxes.

Unlike the 200 FTEs discussed above, which would increase the staffing
devoted to collecting taxes, the other 33 FTEs being requested for the walk-
in program would increase the number of FTEs devoted to providing walk- in
assistance. IRS' budget request provides little information that can help
Congress evaluate the need for additional walk- in staff. IRS says that
funding of its request will “increase the level of customer
service.” However, although IRS has efforts underway to measure such
service indicators as wait time and quality, its budget currently includes
no such measure. In fact, one measure in IRS' budget request (customer
satisfaction with walk- in assistance) indicates that service might already
be at an acceptable level. According to that measure, customers gave the
walk- in program a satisfaction rating of 6.4 on a scale of 1 to 7, with 7
meaning “very satisfied.” That rating is the highest of all the
customer satisfaction ratings reported in IRS' budget request.

Information we received from IRS' Budget Office indicated that the
additional walk- in staff would allow IRS to enhance the accessibility of
its walk- in assistance by expanding the hours of service at walk- in
offices and expanding efforts to help taxpayers (through such nontraditional
outlets as shopping malls and taxmobiles) who cannot easily reach a walk- in
office. However, the budget request does not reflect any impact from that
expanded service. In fact, the request shows that IRS expects 10.0 million
walk- in contacts in fiscal year 2001- the same number as in 1999 and 2000.

STABLE also includes 200 FTEs for additional document matching within IRS'
Underreporter Program. IRS' budget justification contains no Underreporter
Program

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 17 GAO/ T- GGD/ AIMD- 00- 133

performance measures related to the Underreporter Program that can be used
to help assess the reasonableness of this request. In our report on IRS'
fiscal year 1999 financial statements, however, we presented the following
information on IRS' performance in this area. 10

“For tax year 1996 [the most recent year for which substantially
complete matching program results were available], IRS' matching program for
individual taxpayers screened about 155 million individual income tax
returns and found that about 12 million (8 percent) had potential
underreported taxes due totaling at least $15 billion. However, IRS
investigated only about 3.1 million (26 percent) of these returns,
accounting for estimated underreported taxes due of about $5. 2 billion (35
percent). . . According to IRS, resource constraints precluded them from
investigating more of these discrepancies and the related estimated
underreported taxes due.”

Beginning in 1995, we reported on serious and pervasive information
technology (IT) management and technical weaknesses at IRS and made
recommendations for correcting them. 11 To minimize the risk of IRS
investing in systems before the recommendations were fully implemented, we
suggested in 1996 that Congress limit IRS' IT spending to cost effective
activities that (1) support ongoing operations and maintenance; (2) correct
pervasive management and technical weaknesses, such as a lack of requisite
systems life cycle discipline; (3) are small, represent low technical risk,
and can be delivered in a relatively short time frame; or (4) involve
deploying already developed systems that have been fully tested, are not
premature given the lack of a complete systems architecture, and produce a
proven, verifiable business value. 12 Since 1996, we have reported on IRS'
progress in implementing our recommendations and reviewed IRS' annual budget
requests to ensure their consistency with IRS' IT management capability and
these spending categories. 13 While IRS has made progress over the last 4
years in addressing our recommendations, it has yet to fully implement them,
and thus they remain operative in assessing IRS' fiscal year 2001 IT budget
request.

10 GAO/ AIMD- 00- 76. 11 Tax Systems Modernization: Management and Technical
Weaknesses Must Be Corrected If Modernization Is to Succeed (GAO/ AIMD- 95-
156, July 26, 1995). 12 Tax Systems Modernization: Actions Underway But IRS
Has Not Yet Corrected Management and Technical Weaknesses (GAO/ AIMD- 96-
106, June 7, 1996). 13 Tax Administration: IRS' Fiscal Year 2000 Budget
Request and 1999 Tax Filing Season (GAO/ TGGD/ AIMD- 99- 140, Apr. 13,
1999); Tax Administration: IRS' Fiscal Year 1999 Budget Request and Fiscal
Year 1998 Filing Season (GAO/ T- GGD/ AIMD- 98- 114, Mar. 31, 1998); Tax
Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season, and
Fiscal Year 1998 Budget Request (GAO/ T- GGD/ AIMD- 97- 66, Mar. 18, 1997);
Tax Administration: IRS' Fiscal Year 1996 and 1997 Budget Issues and the
1996 Filing Season (GAO/ T- GGD- 96- 99, Mar. 28, 1996). Fiscal Year 2001

Information Technology Budget Request: Observations and Suggestions

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 18 GAO/ T- GGD/ AIMD- 00- 133

For fiscal year 2001, IRS' Information Systems appropriation request is
$1.58 billion and includes 7,531 FTEs. Of the $1.58 billion, $1.54 billion
is to fund the operation and maintenance of existing systems. The remaining
$40 million is for what IRS terms “Business Line Investments.”
The investments are intended to add new capabilities to five operational
systems and develop three new systems that, according to IRS officials,
address business needs that are unique to some of IRS' newly formed
operating divisions and are not related to, or dependent upon, IRS' core
business systems modernization program.

In addition to the $1.58 billion, IRS is requesting $119 million for fiscal
year 2001- and an advance appropriation of $375 million for fiscal year
2002- for IRS' multiyear capital account that is intended to fund contractor
costs associated with IRS' core business systems modernization program. This
account, referred to as the Information Technology Investments Account
(ITIA), currently contains $438 million in appropriated, but unobligated,
funds. 14

Pursuant to legislation, 15 funds from the ITIA are not available to IRS for
obligation until IRS and Treasury submit to Congress for approval an
expenditure plan that (1) implements the IRS Modernization Blueprint; (2)
meets Office of Management and Budget (OMB) investment guidelines; (3) is
reviewed and approved by IRS' Investment Review Board, 16 OMB, and
Treasury's IRS Management Board and is reviewed by us; (4) meets
requirements of IRS' life cycle program; and (5) is in compliance with
acquisition rules, requirements, guidelines, and systems acquisition
management practices of the federal government. In May 1999, IRS submitted
its first expenditure plan, seeking to spend about $35 million for
modernization initiatives through October 31, 1999. We reported to Congress
that the plan was an appropriate first step toward successful modernization,
but that the key to success for IRS would be to effectively implement the
plan. 17 Subsequently, the relevant appropriations subcommittees agreed to
IRS' obligation of $35 million from the ITIA.

14 Of the $438 million, $227 million is to expire on September 30, 2000, and
the remaining $211 million is to expire on September 30, 2002. 15 The fiscal
year 1998 Treasury and General Government Appropriations Act (P. L. 105- 61)
and the fiscal year 1999 Omnibus Consolidated and Emergency Supplemental
Appropriations Act (P. L. 105- 277). 16 According to IRS, the Investment
Review Board has been replaced by the Core Business Systems Executive
Steering Committee, which is chaired by the Commissioner of Internal
Revenue. 17 Tax Systems Modernization: Results of Review of IRS' Initial
Expenditure Plan (GAO/ AIMD/ GGD- 99206, June 15, 1999).

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 19 GAO/ T- GGD/ AIMD- 00- 133

IRS was unable to finalize its second expenditure plan before the original
$35 million was obligated and on December 14, 1999, it requested approval to
obligate $33 million from the ITIA as a “stopgap” measure until
the next expenditure plan was submitted. In briefings to the relevant
appropriations subcommittees and IRS, we reported our concerns about IRS'
lack of progress in completing and implementing an enterprise systems
architecture and system development life cycle and the risks associated with
IRS' plans to develop selected systems without these critical management
controls in place. In approving IRS' $33 million request, the appropriation
subcommittees directed IRS to, among other things, (1) expedite completion
and implementation of the architecture and system life cycle methodology and
(2) explain in future expenditure plans how IRS plans to manage the risk of
performing detailed design or development work if the architecture is not
completed or the life cycle is not implemented.

In response to these and other concerns raised by the appropriations
committees, OMB, and us, IRS has reassessed its plans and is in the process
of restructuring its modernization program to scale- back its new system
development efforts until it first puts in place the requisite modernization
management capability, including developing its enterprise architecture and
implementing its system life cycle methodology. In early March 2000, IRS
submitted its second expenditure plan to Congress seeking approval to
obligate $176 million of the $438 million currently in the ITIA.

The vast majority (97 percent) of IRS' fiscal year 2001 request of $1.58
billion for its Information Systems appropriation appears in line with the
aforementioned spending categories. Specifically, $1.54 billion is being
requested to operate and maintain existing information systems that support
day- to- day tax administration functions and activities. The remaining 3
percent, or $40 million, is for eight relatively small “Business Line
Investments” that are to enhance existing operational systems and
develop new ones. Specifically, five investments, estimated at about $13
million, are to add capabilities to operational systems, such as the
Integrated Case Processing System and the Chief Counsel Case Management
System. The other three investments, estimated at about $27 million, are to
develop new systems for some of IRS' new operating divisions.

For example, one of these investments- referred to by IRS as the Near Term
Electronic Filing and Electronic Fraud Detection System project- is for the
Wage and Investment Income Division and the Small Business and Fiscal Year
2001 Information

Systems Budget Request Appears Consistent With Established Spending
Categories

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 20 GAO/ T- GGD/ AIMD- 00- 133

Self Employed Division. This system is to provide the capability to accept
additional tax forms and schedules that IRS is currently not capable of
receiving electronically. According to IRS, the system will support IRS'
goal of enabling more taxpayers to file their tax forms and schedules
electronically.

Key provisions of the Clinger- Cohen Act, the Government Performance and
Results Act, and OMB Circular No. A- 11 and supporting memoranda, require
that, before requesting multiyear funding for capital asset acquisitions,
agencies develop accurate, complete cost data and perform thorough analyses
to justify the business need for the investments. For example, agencies must
show that needed investments (1) support a critical agency mission; (2) are
justified by life cycle cost- benefit analysis (i. e., business case); and
(3) have cost, schedule, and performance goals.

IRS' Chief Information Officer (CIO) acknowledged that IRS has not yet
performed the above- cited analyses to justify its fiscal year 2001
investment account request of $119 million and its fiscal year 2002 advance
request of $375 million. Instead, IRS officials told us that the funding
requests for both years were based on a $300 million average annual rate of
spending, which, according to the CIO, was derived 6 months ago based on
full contractor staffing of the maximum number of projects that IRS assumed
its human capital capacity would allow it to manage effectively at one time.
However, the reliability of this estimate is questionable because we were
not provided any verifiable documentation supporting the abovedescribed
estimating approach, and the estimate is not based on a complete definition
of what IRS' fiscal year 2001 and 2002 investments will be. Moreover, even
using the above- described rationale for how the 2001 and 2002 funding
requests were derived, the estimate is likely overstated for two reasons.
First, IRS has recently reassessed its human capital capacity to manage
projects and has determined that the number of projects it can effectively
oversee needed to be scaled back, which in turn has reduced contractor
staffing needs. Second, the $300 million estimate represented the upper
bound of IRS' funding requirements for a given year, according to the CIO.

We suggest that Congress consider denying the $119 million requested for
fiscal year 2001 and the $375 million requested for fiscal year 2002, and
that it direct IRS to develop a credible and verifiable fiscal year 2001
ITIA budget request (i. e., a request that is based on defined modernization
requirements and formal estimating methods) and to seek, if necessary, a
supplemental appropriation for this amount in time to meet its fiscal year
2001 needs. Neither of these congressional actions should affect continuity
Fiscal Years 2001 and 2002 ITIA

Requests Are Not Adequately Justified

Matter for Consideration by Congress

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 21 GAO/ T- GGD/ AIMD- 00- 133

of the modernization because (1) IRS' own plans for obligating available
ITIA funds will leave $51 million in the account for the remainder of fiscal
year 2000, 18 and $211 million to cover funding needs in fiscal year 2001,
even if IRS does not receive a supplemental, and (2) IRS can still request
funding for fiscal year 2002 in its fiscal year 2002 budget submission, when
it should be in a better position to reliably estimate its funding needs.

IRS has requested $182 million to cover reorganization expenses-$ 140
million in base funding from the fiscal year 2000 budget plus an additional
$42 million requested for fiscal year 2001. According to IRS, reorganization
costs will peak in fiscal year 2001, decline in 2002, and end in 2003. This
funding pattern is consistent with IRS' plan for implementing the
reorganization, which shows a significant amount of activity in fiscal year
2001 with lesser amounts continuing into 2003. Other costs associated with
IRS' modernization, such as the costs associated with training staff and
upgrading IRS' computer systems, should continue well past 2003.

Over the past year, IRS has made progress in shifting to the new
organizational structure. IRS has selected the Commissioners and Deputy
Commissioners for each of the four operating divisions and has put in place
management structures for several new units, including the Taxpayer Advocate
Service and the Tax Exempt and Government Entities Division. The two largest
operating divisions, those serving individual taxpayers and small
businesses, are expected to become operational this fall, but key aspects of
the organizational designs are to be phased in over the following 2 years.
Plans for the Wage and Investment Income Division, for example, include new
compliance approaches that IRS plans to implement or pilot test in fiscal
year 2002.

In our testimony on IRS' fiscal year 2000 budget request, we commented that
IRS did not separately identify an amount for the Office of the Taxpayer
Advocate, but instead included it within the Telephone and Correspondence
budget activity in the Processing, Assistance, and Management appropriation.
19 We suggested that congressional oversight of the Advocate's Office and
IRS' efforts to solve taxpayer problems would be further enhanced and any
concerns about the Advocate Office's independence would be further mitigated
if funding for that Office was separately identified in IRS' budget. IRS
created a separate budget activity

18 This $51 million, if not obligated by September 30, 2000, will expire. 19
GAO/ T- GGD/ AIMD- 99- 140. IRS' Reorganization Effort

Is Continuing

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 22 GAO/ T- GGD/ AIMD- 00- 133

for the Taxpayer Advocate Service in fiscal year 2000, which it has included
in its fiscal year 2001 budget request.

In that same testimony, we discussed how IRS' budget request commingles
resources for enforcement and assistance. The Telephone and Correspondence
budget activity, for example, includes resources for several forms of
assistance, such as answering telephone calls and correspondence, as well as
several enforcement activities, such as audits handled through
correspondence and attempts to collect overdue taxes via the telephone. When
we raised the same issue in our report on IRS' fiscal year 1999 financial
statements, IRS said that it would be addressing the issue in its new
organizational structure. 20

As noted in our earlier discussion of STABLE, several portions of IRS'
budget request do not contain a clear link between the resources being
requested and expected results. As we have noted in the past, the Government
Performance and Results Act of 1993 aims for a closer and clearer link
between the process of allocating resources and the expected results to be
achieved with those resources. 21 We further noted that an agency's
performance goals are of little value to congressional appropriation
decisions without a connection to the resources that an agency is
requesting. 22

While we recognize that it is not easy to clearly link budget levels and
performance results, we believe that IRS could do a better job of making
that connection. For example, IRS' request does not clearly link the various
budgetary inputs that affect toll- free level of service with IRS' goal in
that area. What the budget shows is a request for about $1 billion for the
Telephone and Correspondence activity and a performance goal of 60- percent
level of service associated with that budget activity. What is unclear from
the budget is (1) that much of the Telephone and Correspondence request is
not for toll- free telephone service; (2) that some of the resources
requested for other activities, such as Examination and Information Systems,
are for toll- free telephone service; and (3) the projected level of service
IRS can expect from its current staffing.

20 GAO/ AIMD- 00- 76. 21 Performance Budgeting: Fiscal Year 2000 Progress in
Linking Plans With Budgets (GAO/ AIMD- 99239R, July 30, 1999). 22
Performance Budgeting: Initial Agency Experiences Provide a Foundation to
Assess Future Directions (GAO/ T- AIMD/ GGD- 99- 216, July 1, 1999). Fiscal
Year 2001 Budget

Request Not Clearly Linked to Performance

Statement Tax Administration: IRS' 2000 Tax Filing Season and Fiscal Year
2001 Budget Request

Page 23 GAO/ T- GGD/ AIMD- 00- 133

IRS is in the process of implementing a major reorganization. That
reorganization and any related budget restructuring, along with IRS' ongoing
efforts to develop new or revised performance measures, could provide an
opportunity to make future budget requests more useful to Congress by more
clearly linking requested resource levels with the achievement of
performance goals.

That concludes my statement. We welcome any questions that you may have.

Appendix I IRS' Fiscal Year 2001 Budget Request Compared With Proposed
Fiscal Year 2000 Operating Level

Dollars in thousands FY 2000 FY 2001 Percent change

Budget activity Dollars FTEs Dollars FTEs In dollars In FTEs

Submission Processing $930,325 15,682 $1,036,818 16,040 11.45 2.28 Telephone
and Correspondence 932,190 20,480 1,026,742 21,291 10.14 3.96 Taxpayer
Advocate Service 133145 2,294 141,095 2,294 5.97 0.00 Document Matching
59,036 1,437 73,023 1,690 23.69 17.61 Management Services 609,771 6,694
686,155 6,694 12.53 0.00 Rent and Utilities 695,579 67 735,666 67 5.76 0.00

Subtotal: Processing, Assistance, and Management Appropriation $3,360,046
46,654 3,699,499 48,076 10.10 3.05

Criminal Investigation 384,549 3,750 399,065 3,750 3.77 0.00 Examination
1,772,371 22,089 1,885,882 22,900 6.40 3.67 Collection 676,676 10,548
721,547 10,785 6.63 2.25 Tax Exempt/ Government Entities 156,600 2,102
168,654 2,166 7.70 3.04 Statistics of Income 28,390 471 29,696 471 4.60 0.00
Chief Counsel 225,059 2,378 234,176 2,372 4.05 -0.25

Subtotal: Tax Law Enforcement Appropriation $3,243,645 41,338 3,439,020
42,444 6.02 2.68

Operations and Maintenance 1,258,155 7,292 1,543,565 7,531 22.68 3.28 Year
2000 250,426 239 0 0 NA NA Investments 0 0 40,000 0 NA NA

Subtotal: Information Systems Appropriation $1,508,581 7,531 1,583,565 7,531
4.97 0.00 Information Technology Investments 0 0 119,000 0 NA NA Earned
Income Credit (outside caps) $144,000 2,082 $145,000 2,082 0.69 0.00 Total
$8,256,272 97,605 $8,986,084 100,133 8.84 2.59

Source: IRS' Fiscal Year 2001 Congressional Justification.

Appendix II Comparison of IRS' Fiscal Year 2000 Proposed Operating Level and
Fiscal Year 2001 Total Budget Request

GAO/ T- GGD/ AIMD- 00- 133

Dollars in thousands Subtotal Total Fiscal year 2000 proposed operating
level (includes Earned Income Tax Credit appropriation) $8,256,272

Decreases for fiscal year 2001 Information Systems (non- recur) ($ 50,897)
Transfer of resources to Treasury Inspector General for Tax

Administration (732)

Subtotal- decreases ($ 51,629)

Increases for fiscal year 2001 Adjustments necessary to maintain current
levels 347,596 Program annualization 40,736 Staffing Tax Administration for
Balance and Equity 144,071 Electronic Tax Administration 3,000 Operational
support contracts 43,631 Organizational modernization 42,407 Business line
investments 40,000 Information Technology Investment Account 119,000 Earned
Income Tax Credit compliance initiative 1,000

Subtotal- increases 781,441 Fiscal year 2001 budget request $8,986,084
Difference between fiscal year 2000 operating level and fiscal year 2001
budget request $729,812

Source: IRS' Fiscal Year 2001 Congressional Justification.

Page 26 GAO/ T- GGD/ AIMD- 00- 133

Page 27 GAO/ T- GGD/ AIMD- 00- 133

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