IRS Business Operations: Issues in Setting Priorities and Managing for
Results (Testimony, 11/07/96, GAO/T-AIMD/GGD-97-22).

GAO discussed the role of the National Commission on Restructuring the
Internal Revenue Service (IRS) in improving IRS business operations. GAO
noted that: (1) full and effective implementation of three recent
management reform laws will help address the fundamental problems
impeding IRS business operations; (2) IRS is being required to submit a
strategic plan and detailed performance measures with its fiscal year
1998 budget request, and the Commission has an opportunity to engage in,
and further, this debate; (3) it would be most helpful if the Commission
could express its views on the appropriate business priorities for IRS,
particularly since IRS may have taken on too many ambitious business
goals and did not set priorities; (4) the Commission could also help to
obtain consensus on IRS business goals and performance measures among
the administration and key congressional committees; (5) IRS lacks
well-defined strategies for making its business vision a reality,
particularly regarding electronic filing of tax returns and taxpayer
service and compliance; (6) the Commission needs to address directly the
importance of IRS, Department of the Treasury, and Office of Management
and Budget oversight of and management follow-through on IRS
implementation efforts; (7) IRS has made some progress in responding to
its persistent problems in preparing reliable financial statements, but
many difficult problems remain to be corrected; and (8) the Commission
can play an important role by recommending priorities and time frames
for corrective actions in this critical area.

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

 REPORTNUM:  T-AIMD/GGD-97-22
     TITLE:  IRS Business Operations: Issues in Setting Priorities and 
             Managing for Results
      DATE:  11/07/96
   SUBJECT:  Tax administration systems
             Strategic planning
             Systems conversions
             Reengineering (management)
             Financial management systems
             Advisory committees
             Information resources management
             Financial statement audits
             Data integrity
             Customer service
IDENTIFIER:  IRS Tax System Modernization Program
             TSM
             
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Cover
================================================================ COVER


Before the National Commission on Restructuring the Internal Revenue
Service

For Release on Delivery
Expected at
11:00 a.m.
Thursday,
November 7, 1996

IRS BUSINESS OPERATIONS - ISSUES
IN SETTING PRIORITIES AND MANAGING
FOR RESULTS

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

GAO/T-AIMD/GGD-97-22

GAO/AIMD-97-22T


(901749)


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

  CFO - Chief Financial Officer
  GPRA - Government Performance and Results Act
  IRS - Internal Revenue Service
  OMB - Office of Management and Budget

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

Messrs.  Chairmen and Members of the Commission: 

I am pleased to be here to discuss the important role that the
Commission can play in improving the Internal Revenue Service's (IRS)
business operations.  GAO has done extensive work detailing the
substantial problems IRS has experienced, and our views on the
pivotal actions that IRS should take to fully implement our many
recommendations were summarized in a September 1996 report, which I
am including for the record.\1

Today, I will focus on three issues the Commission should consider as
part of its review of IRS' present practices and the improvements
necessary to modernize its operations. 

First, I would encourage the Commission to evaluate IRS' management
operations and practices in light of recently enacted management
reform legislation--the Chief Financial Officers Act of 1990, the
Government Performance and Results Act of 1993, and the Clinger-Cohen
Act of 1996.  The Government Performance and Results Act, in
particular, is intended to produce a realistic set of business goals
and priorities for IRS and a discrete number of performance measures
to permit the Congress to track IRS' progress and to hold it
accountable for achieving results.  The Commission has an opportunity
to make excellent contributions in these areas.  Second, emphasis
needs to be placed on IRS' development of effective implementation
strategies.  The lack of solid implementation strategies has been a
major achilles heel to attaining IRS' business vision and fixing
known, long-standing problems.  Finally, any effort to modernize IRS'
operations requires reliable cost and performance information. 
Without good data, the Congress and the executive branch will not be
in a good position to assess IRS' performance, its resource needs,
and the need for remedial actions in a timely manner. 


--------------------
\1 Internal Revenue Service:  Business Operations Need Continued
Improvement (GAO/AIMD/GGD-96-152, September 9, 1996). 


   SETTING PRIORITIES AND
   PERFORMANCE MEASURES
---------------------------------------------------------- Chapter 0:1

The Congress' desire to enhance agencies' accountability for their
performance is at the heart of three pieces of management reform
legislation of the 1990s:  the Chief Financial Officers Act (CFO) Act
of 1990, the Government Performance and Results Act (GPRA) of 1993,
and the Clinger-Cohen Act of 1996.  These laws represent the
Congress' efforts to modernize the operations of federal agencies and
impose a strengthened framework for management and accountability. 

The Congress enacted the CFO Act to remedy decades of serious neglect
in federal financial management by establishing chief financial
officers across government and requiring the preparation and audit of
annual financial statements, among other things, to provide
accountability.  GPRA, which is directed at improving program
performance, requires each agency to consult with the Congress and
other stakeholders in developing its mission and strategic goals. 
The act also requires each agency to establish annual performance
goals, measure performance against these goals, and report publicly
on how well it is doing.  Finally, the recently enacted Clinger-Cohen
Act requires agencies to apply these principles--goal setting,
performance measurement, and reporting--to their information
technology investments. 

Full and effective implementation of these management reforms will
help address the fundamental problems impeding IRS' business
operations.  Most of GAO's specific recommendations to improve IRS'
management are directed at promoting effective implementation of
these essential management mandates of the Congress.  I strongly
encourage the Commission to use this framework in formulating its
recommendations to help push IRS further toward successful
implementation. 

The GPRA mandate to submit strategic goals and performance measures
in particular, offers a unique opportunity for the Commission.  IRS
is being required to submit a strategic plan and detailed performance
measures with its fiscal year 1998 budget request.  This submission
will be deliberated upon by the Congress in the coming months. 
Consequently, the Commission has a natural window of opportunity to
engage in, and further, this debate. 

It would be most helpful, for example, if the Commission could
express its views on the appropriate business priorities for IRS. 
While there are many management and technical reasons why IRS has not
achieved its business vision, a reasonable hypothesis can be advanced
that it took on too many ambitious business goals and did not set
priorities, particularly given the unrelenting production demands of
the annual tax filing season.  Similarly, under the GPRA pilot
program, IRS did not focus on a small number of critical areas.  This
lack of prioritization has plagued the tax system modernization
effort as well. 

Operating under its charter from the Congress, the Commission also
can help further the essential process of obtaining consensus on IRS'
business goals and performance measures among the administration and
key congressional committees.  The GPRA process was intended to help
achieve this result; however, it will require much consultation and
deliberation.  For example, the conference report accompanying IRS'
appropriations bill for fiscal year 1997 underscored concerns about
past problems in measuring IRS' performance, especially in the areas
of taxpayer service and assistance, tax collection, and compliance. 
The conferees stressed the need for valid performance measures and
called for a strategic plan and detailed performance measures to be
submitted with IRS' fiscal year 1998 budget request. 


   ENSURING EFFECTIVE
   IMPLEMENTATION STRATEGIES
---------------------------------------------------------- Chapter 0:2

While establishing business goals and priorities is an essential
point of departure for improving IRS' operations, the expected
results from this process will not be achieved without effective
implementation strategies.  IRS has set a business vision for itself
that has been refined over time, but the differences between IRS'
current operations and those proposed in its vision are great.  One
of the primary reasons for this is the absence of well defined
strategies for making IRS' business vision a reality. 

This problem is clearly illustrated by the fact that although
increasing electronic filing has been a mainstay of IRS' business
vision for some time, IRS does not yet have a comprehensive business
strategy to reach or exceed its goal of 80 million electronic filings
by 2001.  IRS' estimates and projections for individual and business
returns suggest that by 2001, as few as 39 million returns may be
submitted electronically--less than half of IRS' goal and only about
17 percent of all returns expected to be filed. 

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 overlooks
most taxpayers, including those who prepare their own tax returns
using personal computers, have more complicated returns, owe tax
balances, and/or are unwilling to pay a fee to a third party to file
a return electronically. 

To date, most of the returns filed electronically are ones that, if
filed on paper, could be filed on forms (like the 1040EZ) that are
among the least costly paper returns to process.  Also, IRS has not
yet successfully addressed one of the major impediments to the
expansion of electronic filing--its cost to the taxpayers.  IRS has
taken a number of actions to address these concerns and is currently
preparing a revised strategy that it plans to have ready this fall. 

Another major goal of IRS' vision is to increase taxpayer service and
compliance, which is dependent in large measure on increasing the use
of, and implementing, new information systems.  However, IRS has not
fully defined business requirements for those systems and lacks a
cost-effective strategy for accessing taxpayer data that may be
needed for customer service and compliance.  For instance, 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. 

No goal or priority for improving IRS' business operations will be
met successfully without effective implementation strategies and
sufficient management follow-through, not only by IRS but also by the
Department of the Treasury and the Office of Management and Budget
(OMB).  While the Commission obviously cannot, and should not, focus
on this level of detail, it needs to address directly the importance
of these management tasks being carried out.  Treasury, in
particular, has recently become more active in oversight.  While that
is a positive development, Treasury'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 good work of this Commission, as well as critical mandates from
the Congress and the administration, will hinge largely upon the
executive branch's capacity to demonstrate effective implementation
and dedicated follow-through.  This has been lacking in the past and
should be addressed by the Commission in its recommendations. 


   REQUIRING RELIABLE COST AND
   PERFORMANCE INFORMATION
---------------------------------------------------------- Chapter 0:3

IRS continues to be plagued by the poor quality of its cost and
performance information.  Measuring performance becomes very
difficult if baseline data are lacking or unreliable, as is the case
at IRS.  Under the CFO Act, IRS began preparing financial statements
for the first time beginning with fiscal year 1992.  We have audited
these statements for fiscal years 1992 to 1995 and have been unable
to express an opinion on their reliability.  We have identified
persistent, fundamental problems, including difficulties in
reconciling the amount of total revenue collected with taxpayer
records in the aggregate, substantiating the amounts of various types
of taxes collected (social security, income, and excise taxes, for
example), and accurately reporting correct amounts for valid and
collectable accounts receivable.  In addition, a significant portion
of IRS' reported $3 billion in nonpayroll operating expenses has not
been able to be verified. 

IRS has made some progress in responding to these problems.  Over the
past 4 years, we have made 59 recommendations to improve IRS'
financial management.  In our assessment this year, we determined
that IRS had completed action on 17 of these recommendations and
efforts are underway to address the remaining areas. 

However, many difficult problems remain to be corrected.  With our
assistance, IRS is working on a plan to solve these problems, with a
goal of having certain issues resolved in time for the fiscal year
1996 financial statement audit.  For some areas, however, especially
in accounting for revenue, IRS will need to make more sweeping
changes to fully address system problems. 

Follow-through by IRS is essential.  Solving these problems is
essential to provide reliable financial information and assure
taxpayers that their tax dollars are properly accounted for.  The
accuracy of IRS' financial statements is also key to both IRS and the
Congress for (1) ensuring adequate accountability for IRS programs,
(2) assessing the impact of tax policies, and (3) measuring IRS'
performance and cost effectiveness in carrying out its numerous tax
enforcement, customer service, and collection activities. 

Any effort to improve and modernize IRS' operations requires at a
minimum the ability to generate accurate, timely, and reliable
financial information that withstands audit scrutiny.  The conference
report accompanying IRS' appropriations bill for fiscal year 1997
expresses concerns about the inability of IRS to prepare auditable
financial statements and directs the IRS to submit a report to the
Appropriations Committees by March 1, 1997, which presents a plan to
correct the serious financial and reporting deficiencies identified
through our financial audits.  The Commission can play an important
role by recommending priorities and time frames for corrective
actions in this critical area. 


-------------------------------------------------------- Chapter 0:3.1

Messrs.  Chairmen and Members of the Commission, this concludes my
statement.  The work of the Commission will be an important impetus
to improving IRS' business operations.  To assist the Commission in
using the GPRA framework, we have provided GAO's Executive Guide: 
Effectively Implementing the Government Performance and Results Act
(GAO/GGD-96-118, June 1996), which has been distributed throughout
the executive branch to help promote successful GPRA implementation. 
I am also providing a list of recent GAO reports and testimonies,
which I believe the Commission will find useful in framing the issues
and focusing on needed solutions. 

We will be pleased to assist the Commission as it continues its work. 


SELECTED RECENT GAO PRODUCTS
================================================== Appendix Attachment

Financial Audit:  Examination of IRS' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-2, June 30, 1993). 

Financial Audit:  Examination of IRS' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-120, June 15, 1994). 

Financial Audit:  Examination of IRS' Fiscal Year 1994 Financial
Statements (GAO/AIMD-95-141, August 4, 1995). 

IRS Operations:  Significant Challenges in Financial Management and
Systems Modernization (GAO/T-AIMD-96-56, March 6, 1996). 

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). 

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). 

Internal Revenue Service:  Business Operations Need Continued
Improvement (GAO/AIMD/GGD-96-152, September 9, 1996). 

Internal Revenue Service:  Critical Need to Continue Improving Core
Business Practices (GAO/T-AIMD/GGD-96-188, September 10, 1996). 

IRS Financial Audits:  Status of Efforts to Resolve Financial
Management Weaknesses (GAO/T-AIMD-96-170, September 19, 1996). 

Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/AIMD-96-101, July 11, 1996). 


*** End of document. ***