IRS Operations: Critical Need to Continue Improving Core Business
Practices (Testimony, 09/10/96, GAO/T-AIMD/GGD-96-188).

GAO discussed opportunities to improve the Internal Revenue Service's
(IRS) business operations. GAO noted that: (1) because IRS has not fully
corrected its management and technical weaknesses, Congress has limited
funding for tax systems modernization (TSM) to critical systems; (2) IRS
needs to develop an effective business vision implementation strategy
that includes performance measures; (3) IRS plans to complete its
electronic filing strategy by October 1996, but it has not fully
addressed implementation of its customer service vision or integration
of its TSM projects with its reengineering efforts; (4) IRS needs to
develop the capacity to make sound information technology investments;
(5) IRS needs to build a technical foundation for its TSM information
systems projects, invest sole TSM management control in one official,
and improve its contracting process; (6) IRS needs to address serious
financial management problems, particularly those concerning its
revenues, tax refunds, accounts receivables, nonpayroll operating
expenses, and available appropriations; (7) IRS, the Department of the
Treasury, the Office of Management and Budget, and Congress must ensure
that IRS follows through on recommended management improvements; (8)
Congress has provided a framework to monitor IRS progress in improving
its management operations and modernizing its tax return processing
system; and (9) the National Commission on Restructuring IRS will have a
principle role in evaluating IRS operations and recommending
organizational, management, and operating changes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD/GGD-96-188
     TITLE:  IRS Operations: Critical Need to Continue Improving Core 
             Business Practices
      DATE:  09/10/96
   SUBJECT:  Tax administration systems
             Systems conversions
             Financial management systems
             Accounts receivable
             Electronic forms
             Customer service
             Strategic information systems planning
             Information resources management
             Systems design
             Reengineering (management)
IDENTIFIER:  IRS Tax System Modernization Program
             TSM
             IRS Electronic Filing System
             IRS Integrated Case Processing System
             IRS Document Processing System
             IRS Cyberfile
             
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Cover
================================================================ COVER


Before the Committee on Governmental Affairs
United States Senate

For Release
on Delivery
Expected at
10 a.m.
Tuesday
September 10, 1996

IRS OPERATIONS - CRITICAL NEED TO
CONTINUE IMPROVING CORE BUSINESS
PRACTICES

Statement of Gene L.  Dodaro
Assistant Comptroller General
Accounting and Information Division

GAO/T-AIMD/GGD-96-188

GAO/AIMD-96-188T


(511523)


Abbreviations
=============================================================== ABBREV

  TSM - x
  IRS - x
  OMB - x
  DPS - x
  ICP - x
  NTIS - x
  CFO - x
  OMB - x
  CFO - x

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be here today to provide an overall perspective on
opportunities to improve the Internal Revenue Service's (IRS)
business operations.  Our reports and recent testimonies before this
Committee extensively describe the substantial problems IRS has
experienced in (1) fulfilling its business vision--reducing the
volume of paper returns, better serving customers, and improving
compliance, (2) overcoming management and technical weaknesses in its
tax systems modernization (TSM) efforts, and (3) improving the
reliability of its financial management and systems used to account
for hundreds of billions of dollars and to measure IRS'
performance.\1

Today, we will focus on pivotal actions that IRS should take to fully
implement our recommendations and improve its management practices. 
These steps include: 

  -- limiting funding for TSM to critical priorities;

  -- developing an effective implementation strategy for achieving
     IRS' business vision that includes an agreed upon set of
     performance measures, which is imperative to changing the way
     IRS operates and serves customers;

  -- developing the capacity to make sound investments in information
     technology, which will be heavily relied upon to achieve IRS'
     business strategy and measure performance;

  -- building the necessary technical foundation for TSM information
     systems projects, which will provide the overall blueprints for
     developing systems, and the disciplined processes needed for
     completing information systems projects timely and economically,
     and ensuring that information systems concepts are transformed
     into practical tools that perform as intended; and

  -- addressing serious and persistent financial management problems,
     which affect the credibility of financial information, such as
     over $1 trillion in monies collected from American taxpayers and
     billions of dollars in delinquent taxes owed to the government. 

We also will underscore the critical importance of follow-through by
IRS, the Department of the Treasury, the Office of Management and
Budget (OMB), and the Congress.  Historically, IRS has not been
highly responsive in fixing business operation problems and
implementing our recommendations.  Treasury, in particular, has
become more active in oversight and, while that is a positive
development, the department's continued focus on monitoring IRS'
corrective actions will be a key factor in ensuring progress.  OMB
needs to emphasize its leadership and oversight roles in resolving
these matters as well. 

The Congress has legislatively established management tools it can
use to closely monitor IRS' progress and hold IRS accountable for
improving its business operations.  These laws include the Chief
Financial Officers Act of 1990; the Government Performance and
Results Act of 1993; the Paperwork Reduction Act of 1995, as amended;
and the Information Technology Management Reform Act of 1996. 

Through this legislation, the Congress has provided an excellent
framework for (1) overseeing IRS' efforts to improve its management
operations and modernize tax processing with more effective
technology and (2) measuring IRS' performance in meeting its business
vision.  In addition, the National Commission on Restructuring IRS,
recently established by the Congress, will have a principal role over
the next year in conducting a broad-based evaluation of IRS'
operations and recommending changes to IRS' organizational structure,
management practices, and operating procedures. 


--------------------
\1 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Overcome To Achieve Success (GAO/T-AIMD-96-75, March 26,
1996); Tax Systems Modernization:  Progress in Achieving IRS'
Business Vision (GAO/T-GGD-96-123, May 9, 1996); Letter to the
Chairman, Committee on Governmental Affairs, U.S.  Senate, on
security weaknesses at IRS' Cyberfile Data Center (AIMD-96-85R, May
9, 1996); Financial Audit:  Actions Needed to Improve IRS Financial
Management (GAO/T-AIMD-96-96, June 6, 1996); Tax Systems
Modernization:  Actions Underway But IRS Has Not Yet Corrected
Management and Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996);
Tax Systems Modernization:  Cyberfile Project Was Poorly Planned and
Managed (GAO/AIMD-96-140, August 26, 1996); and Internal Revenue
Service:  Business Operations Need Continued Improvement
(GAO/AIMD/GGD-96-152, September 9, 1996). 


   LIMITING FUNDING FOR TSM TO
   CRITICAL AREAS
---------------------------------------------------------- Chapter 0:1

In its May 6, 1996, status report on TSM to the Senate and House
Appropriations Committees, Treasury candidly assessed TSM progress
and future redirection.  It described ongoing and planned actions
intended to respond to our July 1995 recommendations to correct
management and technical weaknesses.\2

It concluded that despite some qualified success, IRS had not made
progress on TSM as planned because systems development efforts had
taken longer than expected, cost more than originally estimated, and
delivered less functionality than originally envisioned.  It further
stated that significant changes were needed in IRS' management
approach and that IRS did not currently have the capability to
develop and integrate TSM without expanded use of external expertise. 

As detailed in our recent studies, IRS has initiated actions that
begin to implement the dozens of recommendations we have previously
made to correct its management and technical problems.  However, as
we reported in June 1996 and our Chief Scientist for Computers and
Telecommunications will discuss in her testimony today, many of these
actions are still incomplete and do not respond fully to any of our
recommendations.\3 As a result, IRS has not made adequate progress in
correcting its management and technical weaknesses.  Consequently, we
reported that, until IRS' weaknesses are corrected and our
recommendations are fully implemented, the Congress should consider
limiting TSM spending to only cost-effective modernization efforts
that

  -- support ongoing operations and maintenance;

  -- correct IRS' pervasive management and technical weaknesses;

  -- are small, represent low technical risk, and can be delivered in
     a relatively short time frame; and

  -- involve deploying already developed systems that have been fully
     tested, are not premature given the lack of a completed
     architecture, and produce a proven, verifiable business value. 

The Senate and House Appropriations Committees are moving in a
direction that is consistent with our suggestion.  In debating IRS'
appropriations for fiscal year 1997, these Committees have proposed,
and the House has passed, significant limitations on TSM funding and
restrictions on the use of TSM funds when they are ultimately
appropriated by the Congress.  Funding limitations and restrictions
would reduce the size of the TSM program and control project
development until IRS strengthens its technical and management
capabilities.  Only then will IRS be able to undertake larger, more
complex, and more expensive system development projects. 


--------------------
\2 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
July 26, 1995). 

\3 Tax Systems Modernization:  Actions Underway But IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June
7, 1996) and Tax Systems Modernization:  Actions Underway But
Management and Technical Weaknesses Not Yet Corrected
(GAO/T-AIMD-96-165, September 10, 1996). 


   EFFECTIVE STRATEGY TO IMPLEMENT
   BUSINESS VISION IS ESSENTIAL
---------------------------------------------------------- Chapter 0:2

In 1986, IRS initiated TSM primarily to replace the computers that it
was using to process and store the information on tax returns.  IRS
planned to introduce the new technology without changing its existing
organizational and operating structure.  In 1992, in response to
recommendations by GAO and others, IRS began to analyze how it might
use new technology to change its business operations.  As a result,
IRS developed a vision for 2001 that called for organizational,
technological, and operational changes affecting the way it processes
tax returns, provides customer service, and ensures compliance. 

Since 1992, IRS has made some progress in modernizing its operations,
but the differences between IRS' current operations and those
proposed in its vision are great.  Part of the reason IRS has not
been more successful in significantly changing its business
operations is that it does not have a well-defined business strategy
for achieving its vision. 

For example, one of the most important business changes was IRS'
decision to significantly increase, by the year 2001, the number of
tax returns received electronically.  Although IRS has implemented
some initiatives that have increased the number of electronic returns
since 1993, IRS does not have a comprehensive business strategy to
reach or exceed its electronic filing goal. 

We have reported that IRS' business strategy would not maximize
electronic filings because it primarily targeted taxpayers who use a
third party to prepare and/or transmit simple returns, are willing to
pay a fee to file their returns electronically, and are expecting
refunds.  Focusing on this limited taxpaying population overlooked
most taxpayers, including those who prepare their own tax returns
using personal computers, have more complicated returns and/or owe
tax balances.  Also, IRS has not yet successfully addressed one of
the major impediments to the expansion of electronic filing--its cost
to taxpayers. 

Accordingly, we recommended that IRS refocus its electronic filing
business strategy to target, through aggressive marketing and
education, those sectors of the taxpaying population that can file
electronically most cost-beneficially.  Also, in October 1995, we
recommended that IRS identify those groups of taxpayers that offer
the greatest opportunity to reduce IRS' paper processing workload and
operating costs if they filed electronically and develop strategies
that focus on eliminating or alleviating impediments that inhibit
those groups from participating in the program.\4

To respond to our recommendations, to date, IRS has initiated some
actions, such as performing an electronic filing marketing analysis
at local levels and developing a marketing plan to promote electronic
filing, which could result in future progress toward increasing
electronic filing.  IRS plans to complete an electronic filing
strategy by October 31, 1996.  The development of this strategy,
which was initially scheduled for completion in August 1996, is
consistent with our recommendation, and we are encouraged that this
initiative could result in future progress toward increasing
electronic filings.  It will, however, be important for IRS to ensure
that the strategy is focused on achieving its electronic filing goals
and to develop and then carry out effective implementation plans. 

In addition, IRS faces several challenges in implementing its
customer service vision.  For service to improve, taxpayers must be
able to reach IRS by telephone when they have questions or problems,
and IRS employees must have easy access to the information needed to
help taxpayers.  IRS' strategy for improving customer service
includes consolidating work units, changing work processes, and
increasing the use of information systems. 

While this strategy offers promise, IRS must address several
important challenges.  Specifically, IRS has to

  -- manage the transition to the customer service vision while
     continuing to answer taxpayer inquiries, manage taxpayer
     accounts, and collect unpaid taxes and

  -- determine the scope of responsibilities for those staff employed
     at customer service centers and provide the necessary training. 

Further, achieving customer service and compliance goals also depends
in large measure on increasing the use of information systems. 
Making it easier for taxpayers to reach IRS by telephone is of
limited value if IRS employees on the other end of the line do not
have access to the data needed to help the taxpayers, which has been
a long-standing problem in IRS.  Also, achieving IRS' goal to
increase compliance hinges on the ability of enforcement staff to
readily access good data. 

IRS eventually intends to provide its employees with access to
greater amounts of on-line taxpayer data in shorter time frames than
current systems can provide.  However, IRS has not fully defined its
business requirements for those systems and lacks a cost-effective
strategy for accessing taxpayer data that may be needed for customer
service and compliance.  Also, IRS has not yet identified all of the
data that enforcement staff need to do their job, which is key in
helping an organization collect good data and make it readily
accessible to employees. 

Finally, TSM projects and reengineering efforts must be integrated. 
One of the managerial weaknesses discussed in our July 1995 report on
TSM that has significant programmatic implications was a lack of
integration of IRS' reengineering efforts and TSM projects. 
Specifically, we said that IRS' business reengineering efforts were
not tied to its TSM projects and that IRS lacked a comprehensive plan
and schedule defining how and when to integrate these business
reengineering efforts with ongoing TSM projects. 

We continue to question IRS' ability to make sound investment
decisions on TSM until the reengineering of important processes is
sufficiently complete.  Reengineering could result in new business
requirements that are not addressed by planned TSM projects or that
make those projects obsolete. 


--------------------
\4 Tax Administration:  Electronic Filing Falling Short of
Expectations (GAO/GGD-96-12, October 31, 1995). 


   DEVELOPING THE CAPACITY TO MAKE
   SOUND TECHNOLOGY INVESTMENTS
---------------------------------------------------------- Chapter 0:3

IRS information systems need to be better managed as investments, and
strategic information management practices are not yet fully in
place.  To overcome this, and provide the Congress with insight
needed to assess IRS' priorities and rationalization for TSM
projects, we recommended that the IRS Commissioner take immediate
action to implement a complete process for selecting, prioritizing,
controlling, and evaluating the progress and performance of all major
information systems investments, both new and ongoing.  This process
should include explicit decision criteria, and we recommended that,
using these criteria, IRS review all planned and ongoing systems
investments. 

IRS has taken positive steps that indicate a willingness to address
the strategic information management problems we have raised.  For
example: 

  -- IRS has created the executive-level Investment Review Board for
     selecting, controlling, and evaluating all of its information
     technology investments. 

  -- IRS has postponed planned software development and deployment of
     personal computers for its Integrated Case Processing (ICP)
     system, which is intended to be a key information system to help
     provide the capability to quickly obtain the data to answer
     taxpayer questions and resolve problems.  According to the
     Associate Commissioner for Modernization, ICP efforts will focus
     on establishing reasonable requirements and initially preparing
     for a smaller systems development effort that represents low
     technical risk and can be delivered in a relatively short time
     frame using outside contractors. 

  -- IRS is reevaluating its need for a Document Processing System
     (DPS), which it began to develop in 1988 in an effort to use
     imaging and optical character recognition technologies to
     process paper tax returns and capture 100 percent of the data on
     those returns.  In April 1992, we said that IRS had not
     adequately assessed the cost-benefit trade-offs associated with
     its strategy for receiving and capturing tax return data using
     DPS.\5 IRS proceeded with the development of DPS without this
     analysis and estimates that it spent about $270 million on DPS
     through fiscal year 1995. 

While IRS has recognized the need to match the scope of TSM projects
with its capabilities and is beginning to scale back its TSM
investment to projects it is more capable of managing, IRS'
investment process is not yet complete.  According to Treasury, it is
missing (1) specific operating procedures, (2) defined reporting
relationships between different management boards and committees, and
(3) updated business cases for major TSM technology investments.  Our
own analysis shows serious weaknesses, such as inadequate data, an
incomplete portfolio, and the lack of an effective investment
evaluation review process. 

Because of the sheer size, scope, and complexity of TSM, it is
imperative that IRS institutionalize a repeatable process for
selecting, controlling, and evaluating its technology investments,
and that it make informed investment decisions based on reliable
qualitative and quantitative assessments of costs, benefits, and
risks.  Although IRS is in the initial stages of implementing parts
of such a process, a complete, fully-integrated process does not yet
exist. 


--------------------
\5 Tax Systems Modernization:  Input Processing Strategy is Risky and
Lacks a Sound Analytical Basis (GAO/T-IMTEC-92-15, April 29, 1992). 


   BUILDING A TECHNICAL FOUNDATION
   FOR TSM
---------------------------------------------------------- Chapter 0:4

Once investment decisions are made, the activities of transforming
these ideas into successfully developed and operated systems requires
following good business practices.  IRS' serious technical weaknesses
continue to impede successful systems modernization.  We have
reported the following. 

  -- IRS' software development activities are inconsistent and poorly
     controlled.  Unless IRS improves its software development
     capability, it is unlikely to build TSM timely or economically,
     and systems are unlikely to perform as intended.  IRS has begun
     to improve its software development capability, but IRS' actions
     are not yet complete or institutionalized, and, as a result,
     systems are still being developed without the disciplined
     practices and metrics needed to give management assurance that
     they will perform as intended. 

  -- IRS' systems architectures,\6 integration planning, and system
     testing and test planning are incomplete.  IRS said that it was
     identifying the necessary actions to define and enforce systems
     development standards and architectures agencywide.  Although
     IRS has taken actions to prepare a systems architecture and
     improve its integration and system testing and test planning,
     these efforts are not yet complete or institutionalized.  As a
     result, TSM systems continue to be developed without the
     detailed architectures and discipline needed to ensure success. 

  -- IRS has not yet established an effective organizational
     structure to consistently manage and control systems
     modernization organizationwide.  IRS has made improvements in
     consolidating management control over systems development, but
     the Associate Commissioner for Modernization still does not have
     control over all IRS systems development activities. 
     Specifically, systems development conducted by the research and
     development division has now been redefined as technology
     research, keeping it from the control of the Associate
     Commissioner. 

IRS has initiated a number of actions to address these weaknesses but
additional measures are necessary to correct them and, in the
interim, to mitigate the risks associated with ongoing TSM spending. 
Key to monitoring and completing these actions will be the
establishment of realistic and achievable target dates, which IRS has
said it plans to do.  However, IRS has not yet set the time frames
for several measures necessary to build a technical foundation for
TSM. 

Also, IRS expects to improve the accountability for and probability
of TSM success by increasing its reliance on contractors.  IRS has
outlined a three-track approach for transitioning over a period of 2
years to the use of a "prime" contractor that would have, according
to IRS, overall authority and responsibility for the development,
delivery, and deployment of modernized information systems.  IRS'
approach to expanding the use of contractors to build TSM is still in
the early planning stages.  Because of this, IRS was unable to
provide us with formal plans, charters, schedules or the definitions
of shared responsibilities between the Government Program Management
Office and the existing program and project management staff. 

Consequently, at this point, it is unclear what these IRS plans
entail, or how they will work.  Further, plans to use additional
contractors will succeed if, and only if, IRS has the in-house
capabilities to manage these contractors effectively.  As discussed
in our recent report on the IRS' Cyberfile project, IRS has serious
problems planning and managing TSM projects using contractors.\7

We found that IRS' selection of the Department of Commerce's National
Technical Information Service (NTIS) to develop Cyberfile was not
based on sound analysis.  IRS did not adequately analyze
requirements, consider alternatives, or assess NTIS' capabilities to
develop and operate an electronic filing system.  IRS selected NTIS
because it was expedient and because NTIS promised IRS, without any
objective support, that it could develop Cyberfile quickly. 
Development and acquisition were undisciplined, and Cyberfile was
poorly managed and overseen. 

As a result, it was not delivered on time, and after advancing $17.1
million to NTIS, IRS has suspended Cyberfile's development and is
reevaluating the project.  The Cyberfile experience has heightened
IRS' awareness that, unless it has mature, disciplined processes for
acquiring software systems through contractors, it will be no more
successful in buying software than it has been in building software. 


--------------------
\6 A system architecture is an evolving description of an approach to
achieving a desired mission.  It describes (1) all functional
activities to be performed to achieve the desired mission, (2) the
system elements needed to perform the functions, (3) the designation
of performance levels of those system elements, and (4) the
technologies, interfaces, and location of functions. 

\7 Tax Systems Modernization:  Cyberfile Project Was Poorly Planned
and Managed (GAO/AIMD-96-140, August 26, 1996). 


   ADDRESSING SERIOUS FINANCIAL
   MANAGEMENT PROBLEMS
---------------------------------------------------------- Chapter 0:5

As part of a pilot program under the Chief Financial Officers (CFO)
Act of 1990, IRS began preparing annual financial statements showing
the results of its operations starting with those for fiscal year
1992.  CFO implementation has (1) led to IRS top managers having a
much better understanding than ever before of IRS' serious accounting
and reporting problems, (2) provided information on the magnitude of
IRS' tax receivables collection problems, and (3) identified the need
for stronger controls over such areas as payroll operations.  The CFO
Act's requirements also have provided the impetus for efforts to
improve IRS operations and address the substantial problems
identified by our financial audits. 

However, we have been unable to express an opinion on the reliability
of IRS' financial statements for any of the 4 fiscal years from 1992
through 1995.\8 We identified fundamental, persistent problems that
remained uncorrected and, until they are resolved, will continue to
prevent us from expressing an opinion on IRS' financial statements in
the future. 

IRS worked to resolve these issues during our fiscal year 1995
financial statement audit and progress was made, but many of IRS'
efforts were incomplete at the conclusion of the audit.  IRS is
continuing these efforts.  Since we testified before the Committee on
June 6, 1996, IRS and GAO have worked to further develop a plan and
strategies for addressing the major weaknesses preventing IRS from
receiving an opinion on its financial statements.  The following
paragraphs discuss IRS' five major uncorrected financial management
problems and short-term plans for resolving them. 

First, the amounts of total revenue (reported to be $1.4 trillion for
fiscal year 1995) and tax refunds (reported to be $122 billion for
fiscal year 1995) cannot be verified or reconciled to accounting
records maintained for individual taxpayers in the aggregate. 
Second, the amounts reported for various types of taxes collected
(social security, income, and excise taxes, for example) cannot be
substantiated.  As a short-term resolution for these two issues, IRS
has developed software programs that it believes will capture, from
its revenue financial management system, the detailed revenue and
refund transactions that would support reported amounts in its future
financial statements until longer term system fixes can be made to
achieve more reliable reporting of these amounts.  In addition, IRS
plans call for completing documentation of its revenue financial
management system, which is critical to aid in identifying better
interim solutions for reporting revenues and refunds and provide
better insights on the longer term system fixes needed to enable IRS
to readily and reliably provide the underlying support for its
reported revenue and refund amounts. 

Third, the reliability of reported estimates for fiscal year 1995 of
$113 billion for valid accounts receivable and of $46 billion for
collectible accounts receivable cannot be determined.  IRS initially
plans to continue efforts to determine a means of using its current
revenue financial management system's coding to identify its accounts
receivables.  IRS' efforts are focused on correcting known current
coding errors through reviewing 100 percent of all receivables over
$10 million.  In addition, IRS plans to ensure more accurate input
and processing of transactions that underpin accounts receivables by
intensifying training efforts and improving internal control policies
and procedures. 

Fourth, a significant portion of IRS' reported $3 billion in
nonpayroll operating expenses cannot be verified.  IRS believes the
core issue for correcting its receipt and acceptance problems relate
to properly accounting for transactions with other federal agencies. 
IRS, GAO, and a contractor are working together to determine the root
causes of and develop solutions to the issue. 

Fifth, the amounts IRS reported as appropriations available for
expenditure for operations cannot be reconciled fully with Treasury's
central accounting records showing these amounts, and hundreds of
millions of dollars in differences have been identified.  IRS
believes that it has completed the reconciliation of its Fund Balance
with Treasury accounts except for IRS' suspense accounts that
contained reconciling items that were more than 6 months old. 
However, IRS is still in the process of making the necessary
adjustments required to its general ledger and the related Treasury
records to complete this effort.  We plan to review IRS'
reconciliation of outstanding differences and verify the accuracy of
adjustments as they are made. 

It will be essential for IRS to now follow through and ensure that
its planned short-term, interim actions are completed on schedule to
improve the reliability of IRS' financial statements.  We will
continue to work with IRS in doing so.  Additionally, some of IRS
corrective actions are longer term and involve reprogramming software
for IRS' antiquated systems and developing new systems. 


--------------------
\8 Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/AIMD-96-101, July 11, 1996); Financial Audit: 
Examination of IRS' Fiscal Year 1994 Financial Statements
(GAO/AIMD-95-141, August 4, 1995); Financial Audit:  Examination of
IRS' Fiscal Year 1993 Financial Statements (GAO/AIMD-94-120, June 15,
1994); and Financial Audit:  Examination of IRS' Fiscal Year 1992
Financial Statements (GAO/AIMD-93-2, June 30, 1993). 


   PROVIDING EFFECTIVE OVERSIGHT
---------------------------------------------------------- Chapter 0:6

The recommendations we have outlined provide a road map for bringing
greatly strengthened management to IRS' operations.  IRS needs to
fully implement these actions in order to fulfill any business
strategy it and the Congress decide upon to provide efficient and
effective taxpayer services into the next century.  But, bringing
these actions to fruition and making needed management improvements a
reality, will require intense follow through and sustained oversight
by IRS top management, Treasury, OMB, and the Congress.  This will be
especially important, as we have not always observed the close
oversight and strong follow through within the Executive Branch that
it will take to overcome the substantial problems IRS has experienced
in effectively carrying out its business vision, successfully
developing TSM, and obtaining an opinion on its financial statements. 

Foremost, IRS and Treasury must concentrate on the specific actions
we have outlined.  We are encouraged that Treasury is taking a more
active role in overseeing IRS' efforts to improve its business
operations.  A joint Treasury-IRS Modernization Management Board,
chaired by the Deputy Secretary of the Treasury, has been established
as the primary review and decision body for modernization and TSM
policy and strategic direction.  For the Board to succeed, however,
it will be essential for it to have independent sources of
information on IRS' efforts and progress to effectively oversee and
track the cost and schedule of all TSM projects. 

For its part, OMB should emphasize reviewing the government's
investment in developing TSM, the use of technology in IRS' changing
business environment, and the steps IRS plans to take to improve its
financial management.  The CFO Act and the Information Technology
Management Reform Act give OMB important leadership responsibilities
in these areas.  In this regard, for example, the Director of OMB is
responsible for (1) promoting and directing that federal agencies
establish capital planning processes for information technology
investment decisions, (2) evaluating the results of those
investments, and (3) enforcing accountability for them through the
budget process. 

The Congress has established a comprehensive legislative framework
that provides the structure necessary to help IRS achieve better
financial and information management and measure the results of
implementing its business vision.  This framework includes: 

  -- the CFO Act's focus for correcting financial management
     weaknesses and reliably reporting on the results of IRS'
     financial operations,

  -- the Government Performance and Results Act's emphasis on
     managing for results and pinpointing opportunities for improved
     performance and increased accountability, and

  -- the amended Paperwork Reduction Act's and the Information
     Technology Management Reform Act's (1) focus on the application
     of information resources to support agency missions and improve
     agency performance and (2) requirements for improving the
     efficiency and effectiveness of operations and the delivery of
     services to the public through an effective use of information
     technology. 

These laws also provide a basis for the Congress to hold IRS
accountable for resolving the weaknesses and taking the actions we
have discussed.  In this regard, the Committee's recent hearings on
these matters have brought greater attention to the consequence of
continued delays in solving IRS' management problems.  We encourage
this Committee, and other congressional oversight and appropriations
committees, to use these management statutes to help focus on the
progress IRS is making to correct these important issues. 


   THE NEW COMMISSION'S ROLE
---------------------------------------------------------- Chapter 0:7

In IRS' appropriations act for fiscal year 1996, the Congress
established the National Commission on Restructuring the IRS.  It
gave the Commission a broad, sweeping charter for reviewing: 

  -- present IRS practices, especially its organizational structure,
     paper and return processing activities, infrastructure, and
     collection process;

  -- what is required for (1) making returns processing "paperless,"
     (2) modernizing IRS operations, (3) improving the collections
     process without major increases in personnel or funding, (4)
     improving taxpayer accounts management, (5) improving accuracy
     of information requested by taxpayers in order to file returns,
     and (6) changing the culture of IRS to make it more efficient,
     productive, and customer oriented;

  -- whether IRS could be replaced with a quasi-governmental
     organization with tangible incentives for managing programs and
     activities, and for modernizing its activities; and

  -- whether IRS could perform other collection, information, and
     financial service functions of the federal government. 

The Commission's 17 members were appointed by congressional leaders
and the President in May 1996.  Cochairing the Commission are Senator
Bob Kerrey and Representative Rob Portman.  The Congress provided $1
million in direct funding for the Commission to examine IRS'
organization and recommend actions to expedite implementation of TSM
and improve service to taxpayers.  The Commission's report, which is
to be completed 1 year after its first meeting, should provide the
Congress an in-depth look at operations and management structures
across IRS and insights for resolving IRS' persistent uncorrected
management problems. 


-------------------------------------------------------- Chapter 0:7.1

Mr.  Chairman, this concludes my statement.  We will be glad to
answer any questions. 


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