Tax Administration: IRS' Fiscal Year 1998 Budget Request (Testimony,
06/19/97, GAO/T-GGD/AIMD-97-130).

GAO discussed the Internal Revenue Service's (IRS) budget request for
fiscal year (FY) 1998.

GAO noted that: (1) IRS' FY 1998 budget request is for about $7.4
billion and 102,385 full-time equivalent (FTE) staff compared to a
proposed operating level in FY 1997 of about $7.2 billion and 102,926
FTEs; (2) IRS' FY 1998 budget request includes $131 million for
developmental information systems, the same amount that was provided in
FY 1997; (3) the administration also is proposing a $1 billion capital
account for IRS information technology investments; (4) neither the $131
million or the $1 billion is supported by the kind of analysis required
by the Clinger-Cohen Act, the Government Performance and Results Act,
and the Office of Management and Budget; (5) therefore, Congress should
consider not funding both the $131 million request and the capital
account until management and technical weaknesses in IRS' modernization
program are resolved and required analyses are completed; (6) the FY
1998 budget request also includes $84 million for IRS' turn of the
century date change effort; (7) IRS has already determined that it will
need $61.2 million more for this effort in FY 1997 than had been
allocated; (8) given that and because IRS' overall conversion needs are
still being determined, it seems reasonable to question whether the
amount requested for this effort in FY 1998 will be sufficient; (9) GAO
also has some concerns about certain FY 1997 budget allocations; (10)
GAO's review of the 1996 debt collection pilot identified various
problems that impeded the pilot's success; (11) until those problems are
resolved, GAO believes that IRS and Treasury should be prohibited from
spending the $26 million; (12) also, given that IRS has decided not to
begin any new systems development projects until October 1998, GAO
believes that Congress should consider rescinding $36 million that was
designated for that purpose in FY 1997; (13) that amount represents the
total allocated to systems development projects that IRS has cancelled
for FY 1997; (14) by October 1998, IRS expects to have developed the
internal capability to effectively manage systems development; (15)
finally, IRS expects the funding limits it faces in FY 1997 and
anticipates for FY 1998 to continue until at least 2002; and (16) fiscal
constraints as well as longstanding concerns about the efficiency of IRS
operations make consensus on IRS' strategic goals and the measures for
assessing progress against those goals critically important.

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

 REPORTNUM:  T-GGD/AIMD-97-130
     TITLE:  Tax Administration: IRS' Fiscal Year 1998 Budget Request
      DATE:  06/19/97
   SUBJECT:  Future budget projections
             Strategic information systems planning
             Systems conversions
             Tax administration systems
             Systems design
             Presidential budgets
             Budget authority rescission
             Budget cuts
             Customer service
             Debt collection
IDENTIFIER:  IRS Corporate Accounts Processing System
             IRS Integrated Case Processing System
             IRS Workload Management System
             IRS Distributed Input System/Remittance Processing System 
             Replacement Project
             IRS Tax System Modernization
             TSM
             
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Cover
================================================================ COVER


Before the Subcommittee on Treasury and General Government, Committee
on Appropriations, U.S.  Senate

For Release
on Delivery
Expected at
9:30 a.m.  EDT
Thursday,
June 19, 1997

TAX ADMINISTRATION - IRS' FISCAL
YEAR 1998 BUDGET REQUEST

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

GAO/T-GGD/AIMD-97-130

GAO/GGD/AIMD-97-130T


(268810)


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

  CIO - Chief Information Officer
  FTE - full-time equivalent
  GPRA - Government Performance and Results Act
  IRS - Internal Revenue Service
  MMB - Modernization Management Board
  OMB - Office of Management and Budget
  TSM - Tax Systems Modernization

TAX ADMINISTRATION:  IRS' FISCAL
YEAR 1998 BUDGET REQUEST
====================================================== Chapter SUMMARY

IRS' fiscal year 1998 budget request is for about $7.4 billion and
102,385 full-time equivalent (FTE) staff compared to a proposed
operating level in fiscal year 1997 of about $7.2 billion and 102,926
FTEs.  IRS' fiscal year 1998 budget request includes $131 million for
developmental information systems, the same amount that was provided
in fiscal year 1997.  The administration also is proposing a $1
billion capital account for IRS information technology investments. 
Neither the $131 million or the $1 billion is supported by the kind
of analysis required by Clinger-Cohen Act, the Results Act, and the
Office of Management and Budget.  Therefore, Congress should consider
not funding both the $131 million request and the capital account
until management and technical weaknesses in IRS' modernization
program are resolved and required analyses are completed. 

The fiscal year 1998 budget request also includes $84 million for
IRS' turn of the century date change effort.  IRS has already
determined that it will need $61.2 million more for this effort in
fiscal year 1997 than had been allocated.  Given that and because
IRS' overall conversion needs are still being determined, it seems
reasonable to question whether the amount requested for this effort
in fiscal year 1998 will be sufficient. 

GAO also has some concerns about certain fiscal year 1997 budget
allocations.  For example, IRS' fiscal year 1997 appropriation
mandated that a total of $26 million be provided for debt collection
pilots.  GAO's review of the 1996 debt collection pilot identified
various problems that impeded the pilot's success.  Until those
problems are resolved, GAO believes that IRS and Treasury should be
prohibited from spending the $26 million.  Also, given that IRS has
decided not to begin any new systems development projects until
October 1998, GAO believes that Congress should consider rescinding
$36 million that was designated for that purpose in fiscal year 1997. 
That amount represents the total allocated to systems development
projects that IRS has cancelled for fiscal year 1997.  By October
1998, IRS expects to have developed the internal capability to
effectively manage systems development. 

Finally, IRS expects the funding limits it faces in fiscal year 1997
and anticipates for fiscal year 1998 to continue until at least 2002. 
Fiscal constraints as well as longstanding concerns about the
efficiency of IRS operations make consensus on IRS' strategic goals
and the measures for assessing progress against those goals
critically important.  The provisions and requirements of the Chief
Financial Officers Act, the Clinger-Cohen Act, and the Results Act
provide a mechanism for accomplishing this. 


TAX ADMINISTRATION:  IRS' FISCAL
YEAR 1998 BUDGET REQUEST
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to participate in the Subcommittee's
inquiry into the Internal Revenue Service's (IRS) budget request for
fiscal year 1998.  Our statement is based on a review of that budget
request; a review of steps taken by IRS in response to its fiscal
year 1997 appropriation, including its spending plans for information
systems; and our past work on IRS' operations and systems
modernization efforts. 

IRS' fiscal year 1998 budget request is for about $7.4 billion and
102,385 full-time equivalent (FTE) staff compared to a proposed
operating level in fiscal year 1997 of about $7.2 billion and 102,926
FTEs.  Appendix 1 provides a more detailed comparison of fiscal years
1998 and 1997 along with data showing how IRS' appropriation has
changed since fiscal year 1991.  Appendix II has trend information
for several of IRS' performance indicators. 

Our statement makes the following points: 

  -- In response to congressional concerns and direction, IRS
     allocated about 1,000 additional FTEs to taxpayer service
     activities in fiscal year 1997 and revised its fiscal year 1997
     information systems spending plans.  IRS has since cancelled
     some of the projects that were included in those plans and that
     it had estimated would cost a total of $36 million in fiscal
     year 1997. 

  -- Our review of IRS' private sector debt collection pilot program
     identified significant barriers to the pilot's success.  Those
     problems should be resolved before fiscal year 1997 funds
     earmarked for private sector debt collection pilots are
     expended. 

  -- IRS' fiscal year 1998 budget request includes $131 million for
     developmental information systems, the same amount that was
     provided in fiscal year 1997.  In addition to that basic
     request, the administration is proposing a capital account for
     information technology investments at IRS--$500 million for
     fiscal year 1998 and another $500 million for 1999.  Neither the
     $131 million or the $1 billion is supported by the type of
     analysis required by the Clinger-Cohen Act, the Government
     Performance and Results Act (otherwise known as the Results Act
     or GPRA), and Office of Management and Budget (OMB) Circular No. 
     A-11. 

  -- The budget request also includes $84 million for IRS' turn of
     the century date change effort.  IRS has already determined that
     it will need several million dollars more for this effort in
     fiscal year 1997 than had been allocated.  Given that and
     because IRS' overall conversion needs are still being
     determined, it seems reasonable to question whether the amount
     requested for this effort in fiscal year 1998 will be
     sufficient. 

  -- IRS is also requesting funds to replace two old systems used to
     process paper returns and remittances.  Because spending on this
     project has been accelerated in fiscal year 1997, all of the
     funding being requested for 1998 may not be needed. 

  -- The largest staffing increase in IRS' budget request is for 195
     FTEs (with an associated cost of $11 million) to process a
     projected increase in the number of tax returns filed in 1998. 
     IRS expects that most of the additional returns will be filed
     electronically.  Data IRS used to determine how much more money
     and staff it needed to process those additional returns show
     only a small difference between the number of FTEs needed to
     process a million electronic returns and the number needed to
     process a million paper returns.  That small difference is
     inconsistent with what we would have expected and may reflect,
     at least in part, the fact that electronic filing is not truly
     paperless. 

  -- Finally, IRS and Congress face many challenges in moving the
     nation's tax system into the next millennium.  Funding limits
     faced by IRS in fiscal year 1997 and anticipated for fiscal year
     1998 are projected to continue until at least 2002.  Fiscal
     constraints as well as longstanding concerns about the
     operations and management of IRS make consensus on IRS
     performance goals and measuring progress in achieving those
     goals critically important.  The provisions and requirements of
     the Chief Financial Officers Act, Clinger-Cohen Act, and Results
     Act provide a mechanism for accomplishing this. 


   OVERVIEW OF 1997 APPROPRIATION
   ISSUES
-------------------------------------------------- Chapter STATEMENT:1

Before discussing the fiscal year 1998 budget request, it might be
useful to summarize some of the issues associated with IRS' fiscal
year 1997 appropriation.  The appropriation act\1 and accompanying
conference report\2 for fiscal year 1997 indicated that Congress was
concerned about various aspects of IRS' operations.  Among other
things, Congress expressed concern about (1) Tax Systems
Modernization (TSM) and the need to direct more systems development
work to the private sector; (2) TSM funds being directed at "feeding
the beast" rather than at true modernization; (3) the ability of
taxpayers to reach IRS over the telephone; and (4) the need to
maintain taxpayer service at fiscal year 1995 levels, at a minimum.\3

In response to its fiscal year 1997 appropriation and the
congressional direction specified therein, IRS, among other things,
(1) revised its spending plans for information systems and (2)
reallocated resources within the processing, assistance, and
management account to direct more FTEs to taxpayer service
activities. 

Another issue associated with IRS' fiscal year 1997 appropriation
involves funding provided for private sector debt collection pilot
programs.  We believe that spending on those programs should be
prohibited until various problems we identified have been resolved. 


--------------------
\1 The Omnibus Consolidated Appropriations Act (P.L.  104-208, Sept. 
30, 1996). 

\2 H.R.  Report No.  863, 104th Cong., 2d sess.  (1996). 

\3 Congress added this requirement because it was concerned that IRS'
pending reorganization of certain field activities would adversely
affect taxpayer service. 


      IRS' FISCAL YEAR 1997
      SYSTEMS SPENDING PLANS
      APPEAR CONSISTENT WITH
      CONGRESSIONAL DIRECTION, BUT
      $36 MILLION MAY NO LONGER BE
      NEEDED
------------------------------------------------ Chapter STATEMENT:1.1

For fiscal year 1997, IRS was appropriated about $1.3 billion to fund
its information systems.  The appropriation act specified that the
$1.3 billion be spent as follows: 

  -- $758.4 million for legacy systems,

  -- $206.2 million for TSM operational systems,

  -- $130.1 million for TSM development and deployment,

  -- $83.4 million for program infrastructure,

  -- $62.1 million for "stay-in-business" projects,

  -- $61.0 million for staff downsizing, and

  -- $21.9 million for telecommunication network conversion. 

IRS' plans for spending its fiscal year 1997 information systems
appropriation and IRS' obligations through December 31, 1996, appear
consistent with the act's direction.  Specifically, at the beginning
of fiscal year 1997, we judgmentally selected eight projects,
totaling approximately $197 million, that IRS planned to fund with
its information systems appropriation and analyzed each relative to
the categories and amounts specified in the act.  Our analysis showed
that IRS identified its projects in accordance with the legislative
categories and that all of the projects we reviewed appeared to be
consistent with the act's categories and spending levels. 

In analyzing IRS' spending, we found that IRS had 15 projects that
were used to justify the allocation of $130.1 million for systems
development and deployment.  Of the 15 projects, 9 (with fiscal year
1997 costs totaling about $87.3 million) were ongoing or completed. 
IRS is reviewing one other project that was used to justify $7
million and canceled the remaining five projects, which had projected
fiscal year 1997 costs totaling about $36 million. 

According to IRS' Chief Information Officer (CIO), IRS canceled these
systems because business case analyses did not justify continued
development.  The canceled projects include the Corporate Accounts
Processing System, the Integrated Case Processing System, and the
Workload Management System. 

The CIO also stated that IRS will not start any new system
development projects until about October 1998, after it has developed
the internal capability needed to effectively manage such projects. 
Therefore, Congress should consider rescinding the $36 million that
IRS will not be using for systems development and deployment in
fiscal year 1997. 

As noted earlier, $61 million of IRS' fiscal year 1997 information
systems appropriation was allocated for staff downsizing.  We
question whether all of the $61 million will be needed for that
purpose.  IRS had requested those funds to downsize its information
systems staff by 819 positions.  According to IRS' Chief for
Management and Administration, however, attrition among information
systems staff has been higher than expected and IRS' downsizing
plans, as of March 3, 1997, included only 228 information systems
positions. 


      INCREASED RESOURCES PROVIDED
      FOR TAXPAYER SERVICE IN 1997
------------------------------------------------ Chapter STATEMENT:1.2

Given congressional concerns about the level of taxpayer service and
the low level of telephone accessibility documented in several of our
reports,\4 IRS decided that its highest priority in 1997, other than
processing returns and refunds, would be to improve taxpayer service,
especially the ability of taxpayers to reach IRS on the phone.  One
important step IRS took to achieve that end was to increase the
number of FTEs devoted to taxpayer service.  According to IRS
estimates, the number of taxpayer service FTEs will increase from
8,031 in fiscal year 1996 to 9,091 in fiscal year 1997.  The
estimated number of FTEs for fiscal year 1997 is also higher than in
fiscal year 1995, which is in accord with congressional direction in
IRS' fiscal year 1997 appropriation.  According to IRS budget
officials, some of these additional FTEs were achieved by
reallocating resources originally targeted for submission processing;
the rest were funded with user fees that IRS is authorized to retain. 

The bulk of the staffing increase for taxpayer service is directed at
helping taxpayers reach IRS by telephone.  In addition to the
increase in taxpayer service FTEs discussed above, IRS also detailed
staff from other functions to help answer the phone, including staff
who would normally be doing compliance work.  This increased
staffing, along with other steps IRS took, seems to have succeeded in
significantly improving telephone accessibility during the 1997 tax
return filing season.  As discussed in more detail in appendix III,
accessibility increased from 20.1 percent during the 1996 filing
season to 50.9 percent during the 1997 filing season. 


--------------------
\4 Tax Administration:  Continuing Problems Affect Otherwise
Successful 1994 Filing Season (GAO/GGD-95-5, Oct.  7, 1994); The 1995
Tax Filing Season:  IRS Performance Indicators Provide Incomplete
Information About Some Problems (GAO/GGD-96-48, Dec.  29, 1995); and
IRS' 1996 Tax Filing Season:  Performance Goals Generally Met;
Efforts to Modernize Had Mixed Results (GAO/GGD-97-25, Dec.  18,
1996). 


      PROBLEMS WITH IRS' PRIVATE
      DEBT COLLECTION PILOT
------------------------------------------------ Chapter STATEMENT:1.3

As part of IRS' fiscal year 1997 appropriation, Congress mandated
that $13 million be made available to extend the private sector debt
collection pilot program that was initiated in fiscal year 1996.  An
additional $13 million was earmarked for a second private debt
collection pilot to be managed by the Department of the Treasury.  To
date, none of the $26 million has been obligated. 

At the request of the Chairman of the Oversight Subcommittee, House
Committee on Ways and Means, we evaluated the initial pilot and found
significant legal, systems and operations, and performance
measurement barriers to the pilot's success.  Specifically we found
that

  -- IRS' legal interpretations prevented the pilot from being a true
     test of private contractors' ability to collect delinquent
     taxes;

  -- systems and operations problems made it difficult to identify,
     select, and transmit cases to the contractors; and

  -- the pilot lacked appropriate performance measures to identify
     and capture the best practices and techniques used by private
     collectors. 

IRS agreed with our findings. 

On the basis of our findings, the Chairmen of the Oversight
Subcommittee; the Subcommittee on Treasury, Postal Service, and
General Government, House Committee on Appropriations; and the
Subcommittee on Government Management, Information, and Technology,
House Committee on Government Reform and Oversight informed the
Secretary of the Treasury that contracts should not be awarded at
this time for the Treasury-managed pilot. 

Until the issues jeopardizing the success of the pilots are resolved,
we believe that IRS and Treasury should be prohibited from spending
both the $13 million to extend the ongoing IRS pilot and the $13
million earmarked for the Treasury-managed private debt collection
pilot. 


   FISCAL YEAR 1998 BUDGET REQUEST
   FOR INFORMATION SYSTEMS RAISES
   SEVERAL QUESTIONS
-------------------------------------------------- Chapter STATEMENT:2

IRS' fiscal year 1998 budget request includes $1.27 billion and 7,162
FTEs for information systems.  Of the $1.27 billion, $1.14 billion is
for operational systems, including funds for IRS' century data change
effort and for replacing two old processing systems.  The rest of the
request ($131 million) is for developmental systems.  In addition to
the $1.27 billion, the administration is requesting $1 billion over 2
years to fund a multi-year capital account, referred to as the
Information Technology Investments Account, for new modernization
projects at IRS. 

Our analysis of the information systems request raised several
questions:  (1) Should Congress approve the $131 million for
developmental systems and the $1 billion capital account given the
absence of the kind of supporting analyses required by the
Clinger-Cohen Act, the Results Act, and OMB?  (2) Is the money being
requested for IRS' century date conversion effort sufficient?  and
(3) Will IRS need all of the money requested for replacing two
processing systems? 


      $131 MILLION BUDGET REQUEST
      FOR SYSTEMS DEVELOPMENT NOT
      JUSTIFIED
------------------------------------------------ Chapter STATEMENT:2.1

The Clinger-Cohen Act, the Results Act, and OMB Circular No.  A-11
and supporting memoranda require that information technology
investments be supported by accurate cost data and convincing
cost-benefit analyses.  For fiscal year 1998, IRS is requesting $131
million for system development.  However, IRS' request does not
include a credible, verifiable justification.  According to IRS
budget officials, $131 million was requested for fiscal year 1998
because it was approximately the same amount IRS received in fiscal
year 1997 for system development. 

The budget request states that IRS does not know how it plans to
spend the $131 million because its modernization systems architecture
and system deployment plan have not yet been finalized.  IRS publicly
issued a draft version of these documents on May 15, 1997, and
provided them to private industry for review and comment by July 15,
1997.  Once finalized, these documents are intended to guide future
systems development. 


      NO JUSTIFICATION TO SUPPORT
      BILLION DOLLAR INFORMATION
      TECHNOLOGY INVESTMENTS
      ACCOUNT
------------------------------------------------ Chapter STATEMENT:2.2

The administration is proposing to establish an Information
Technology Investments Account to fund future modernization
investments at IRS.  It is seeking $1 billion--$500 million in fiscal
year 1998 and another $500 million in fiscal year 1999--for
"yet-to-be-specified" development efforts.  According to IRS'
request, the funds are to support acquisition of new information
systems, expenditures from the account will be reviewed and approved
by Treasury's Modernization Management Board (MMB), and no funds will
be obligated before July 1, 1998. 

The Clinger-Cohen Act, the Results Act, and OMB Circular No.  A-11
and supporting memoranda require that, prior to requesting multi-year
funding for capital asset acquisitions, agencies develop accurate,
complete cost data and perform thorough analyses to justify the
business need for the investment.  For example, agencies need to show
that needed investments (1) support a critical agency mission; (2)
are justified by a life cycle based cost-benefit analysis; and (3)
have cost, schedule, and performance goals. 

IRS has not prepared such analyses for its fiscal year 1998 and 1999
investment account request.  Instead, IRS and Treasury officials
stated that, during executive-level discussions, they estimated that
they would need about $2 billion over the next 5 years.  This
estimate was not based on analytical data or derived using formal
cost estimating techniques.  According to OMB officials responsible
for IRS' budget submission, the request was reduced to $1 billion
over 2 years because they perceived the lesser amount as more
palatable to Congress.  These officials also told us that they were
not concerned about the precision of the estimate because their first
priority is to "earmark funds" in the fiscal year 1998 and 1999
budgets so funds will be available when IRS eventually determines how
it wants to modernize its systems. 


      IRS AND TREASURY ARE STILL
      ADDRESSING MODERNIZATION
      WEAKNESSES
------------------------------------------------ Chapter STATEMENT:2.3

In 1995 we made over a dozen recommendations to the Commissioner of
Internal Revenue to address systems modernization management and
technical weaknesses.\5 We reported in 1996 that IRS had initiated
many activities to improve its modernization efforts but had not yet
fully implemented any of our recommendations.\6 Congress also took
steps to improve the modernization effort.  Specifically, in the
fiscal year 1997 Omnibus Appropriations Act\7 , Congress directed IRS
to (1) submit by December 1, 1996, a schedule for transferring a
majority of its modernization development and deployment to
contractors by July 31, 1997, and (2) establish a schedule by
February 1, 1997, for implementing our recommendations by October 1,
1997.  In its conference report on the act, Congress directed the
Secretary of the Treasury to (1) provide quarterly reports on the
status of IRS' corrective actions and modernization spending\8

and (2) submit by May 15, 1997, a technical architecture for the
modernization that had been approved by the MMB.  Additionally, the
MMB was directed to prepare a request for proposal by July 31, 1997,
to acquire a prime contractor to manage modernization deployment and
implementation. 

IRS and Treasury have taken steps to address our recommendations and
respond to congressional direction.  For example, in response to the
1997 appropriations act, IRS (1) provided a November 26, 1996, report
to Congress that set forth IRS' strategic plan and schedule for
shifting modernization development and deployment to contractors and
(2) submitted to Congress a February 27, 1997, report on the
timetable for implementing our recommendations.  For its part,
Treasury (1) provided corrective action and spending reports to
Congress for the first quarter of fiscal year 1997 and (2) submitted
an MMB-approved architecture to Congress on May 15, 1997, that the
department and IRS have circulated to private industry for review and
comment.  As part of this effort, Treasury and IRS are also
soliciting private industry input on prime contractor management
strategies. 

To assess the effectiveness of IRS' efforts to date, we are reviewing
IRS' (1) recently issued modernization architecture, (2) capability
to acquire software-intensive systems using contractors, and (3)
information technology investment management process.  While the
results of these reviews are not yet known, it is important to
reiterate what we have said before--until IRS fully implements our
recommendations, its systems modernization will continue to be at
risk.\9


--------------------
\5 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156,
July 26, 1995). 

\6 Tax Systems Modernization:  Actions Underway But IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June
7, 1996). 

\7 Public Law 104-208, September 30, 1996. 

\8 H.R.  Report No.  863, 104th Cong., 2d sess.  (1996).  Congress
also required that Treasury provide a schedule for developing and
implementing all modernization projects in Treasury's fiscal year
1996 appropriations act (Public Law 104-52, Nov.  19, 1995). 

\9 GAO High-Risk Series, IRS Management (GAO/HR-97-8, Feb.  1997). 


------------------------------------------------ Chapter STATEMENT:2.4

Given IRS' poor track record delivering cost-beneficial TSM systems
and the lack of justification for proposed system expenditures,
Congress should consider not funding both the $131 million request
for systems development and the $1 billion capital account until the
management and technical weaknesses in IRS' modernization program are
resolved and the required justifications are completed. 


      FUNDING NEEDS FOR CENTURY
      DATE CHANGE ARE UNCERTAIN
------------------------------------------------ Chapter STATEMENT:2.5

IRS, like other federal agencies, is in the midst of a major project
aimed at making its computer systems "century date compliant."
Because IRS' systems, like many others in government and the private
sector, use two-digit date fields, they cannot distinguish, for
example, between the year 1900 and the year 2000 (the systems would
show both years as "00").  IRS estimates that the failure to correct
this situation before 2000 could result in millions of erroneous tax
notices, refunds, and bills.  Accordingly, IRS' CIO has designated
this effort as a top priority.  The CIO established a year 2000
project office to coordinate work among the various IRS organizations
with responsibility for assessing, converting, and testing IRS
systems. 

IRS' current plans are to spend $106.2 million on century date
conversion efforts in fiscal year 1997.  This would exceed its fiscal
year 1997 budget by $61.2 million.  Of this amount,

  -- $47.7 million is for non labor costs ( e.g., the purchase of
     updated operating system environments, contractor support for
     software conversion and testing, and additional hardware for
     expected capacity increases) and

  -- $13.5 million is for additional labor costs, which is to come
     from IRS' existing budget for overall information systems
     staffing. 

To meet these needs, IRS is seeking approval to reprogram some fiscal
year 1997 funds from other accounts and to use available "no-year"
TSM funds.  In addition, the Chief Financial Officer's organization
is conducting an IRS-wide review to identify other sources of funding
should they be needed. 

IRS' fiscal year 1998 budget request includes another $84 million for
the century date change effort.  It is uncertain, however, if this
amount will be sufficient to address IRS' century date funding needs
for fiscal year 1998.  The fiscal year 1998 request was based on
September 1996 cost estimates that, in turn, were based on an
estimate of lines of computer code for IRS' main tax processing
systems.  However, there are potentially significant costs in other
areas for which IRS has yet to complete initial assessments,
including (1) secondary tax processing systems that are also critical
to the tax administration process; (2) telecommunications; (3)
commercial off-the-shelf software; and (4) non-information technology
resources, such as elevators and heating and air conditioning units. 
IRS has efforts underway to address each of these areas.  For
example, IRS recently formed a committee of executives to address
options for dealing with secondary systems.  By the end of June, the
committee expects to have made decisions on which of these systems
will or will not be converted.  IRS officials said that they expect
to have a complete cost estimate for converting these systems by
September 1997. 


      REPLACEMENT OF SYSTEMS THAT
      PROCESS PAPER TAX RETURNS
      AND REMITTANCES
------------------------------------------------ Chapter STATEMENT:2.6

Also as part of its information systems request, IRS is asking for
$44 million in fiscal year 1998 to continue developing replacements
for two systems--the Distributed Input System (a 12-year old system
used to process paper returns) and the Remittance Processing System
(an 18-year old system used to process tax payments)--and to begin
pilot testing in January 1998.  IRS reports that the systems are
unreliable, costly to operate and maintain, and not year 2000
compliant. 

Project officials told us that to meet the January 1998 milestone for
piloting the new systems, an additional $6.1 million of fiscal year
1997 money has been reprogrammed to the Distributed Input
System/Remittance Processing System replacement project. 
Consequently, the project will not need this $6.1 million in fiscal
year 1998.  Accordingly, Congress should consider reducing the fiscal
year 1998 request for this project by $6.1 million. 


   REQUEST FOR ADDITIONAL RETURNS
   PROCESSING STAFF RAISES
   QUESTIONS ABOUT BENEFITS OF
   ELECTRONIC FILING
-------------------------------------------------- Chapter STATEMENT:3

IRS' largest requested budget increase is for $214 million and 195
FTEs to maintain its fiscal year 1997 program levels in fiscal year
1998.  According to IRS, most of the $214 million is needed to cover
pay and benefits for the employees it has on board.  However, $11
million and all 195 FTEs are intended to cover "mandatory workload
increases" in its returns processing function.  More specifically,
IRS has projected that the number of primary tax returns filed will
increase from 197.9 million in 1997 to 200 million in 1998.  IRS has
also projected that 91 percent of the increase in primary tax returns
(or 1.9 million returns) will be filed electronically. 

The data IRS used to determine its need for $11 million and 195 FTEs
indicated that IRS only saves about 5 FTEs for every 1 million
returns that are filed electronically.  This is contrary to what we
would have expected.  Because up-front filters keep certain taxpayer
errors that are common on paper returns from contaminating electronic
returns and because electronic returns bypass the labor intensive and
error prone key punching process IRS uses for paper returns, we would
expect that the labor and related costs to process
electronically-filed returns would be substantially lower than the
labor and costs associated with processing paper returns.  According
to IRS budget officials, IRS has an effort underway to determine the
comparative cost of processing electronic and paper tax returns. 
They expect that study to be completed in September 1997. 

At least part of the smaller-than-expected savings from electronic
filing can be attributed to the fact that electronic filing is not
truly paperless.  Taxpayers filing electronically, other than through
TeleFile, must submit a paper signature document to authenticate the
electronic portion of their return.  And IRS has to process that
document.  In January 1993, we reported that to significantly
increase the use of electronic filing IRS would have to resolve
various issues that adversely affect the appeal of electronic
filing.\10 One of those issues is the requirement to submit paper
documents with an electronic return. 


--------------------
\10 Tax Administration:  Opportunities to Increase the Use of
Electronic Filing (GAO/GGD-93-40, Jan.  22, 1993). 


   CHALLENGES FOR THE FUTURE
-------------------------------------------------- Chapter STATEMENT:4

As discussed earlier, IRS data indicate that taxpayers had a much
better chance of reaching IRS by telephone during the 1997 filing
season than they had in 1996.  This improvement, however, was not
without cost.  IRS used various strategies to improve accessibility,
one of which involved detailing staff from other functions, including
staff who would otherwise be auditing tax returns, to answer the
phone.  The funding limits and program tradeoffs faced by IRS in
fiscal year 1997 and anticipated for fiscal year 1998 are likely to
continue for the foreseeable future.  The administration's outyear
projections actually reflect a decline in IRS funding when inflation
is considered. 

At the same time, IRS is faced with competing demands and pressure
from external stakeholders, including Congress, to improve its
operations and resolve longstanding concerns.  Modernization of IRS'
processes and systems is critical to doing this.  So is reaching
consensus on IRS' strategic goals and performance measures. 

In recent years, Congress has put in place a statutory framework for
addressing these challenges and helping Congress and the executive
branch make the difficult trade-offs that the current budget
environment demands.  This framework includes as its essential
elements the Chief Financial Officers Act; information technology
reform legislation, including the Paperwork Reduction Act of 1995 and
the Clinger-Cohen Act; and the Results Act, or GPRA. 

In crafting these acts, Congress recognized that congressional and
executive branch decisionmaking had been severely handicapped by the
absence in many agencies of the basic underpinnings of well managed
organizations.  We have found numerous examples across government of
management-related challenges stemming from unclear missions
accompanied by the lack of results-oriented performance goals, the
absence of detailed business strategies to meet those goals, and the
failure to gather and use accurate, reliable, and timely program
performance and cost information to measure progress in achieving
results.  All of these problems exist at IRS.  To effectively bridge
the gap between IRS' current operations and its future vision while
living within the budget constraints of the federal government, these
challenges must be met. 

Under GPRA, every major federal agency must ask itself some basic
questions:  What is our mission?  What are our goals and how will we
achieve them?  How can we measure performance?  How will we use that
information to make improvements?  GPRA forces a focus on results. 
GPRA has the potential for adding greatly to IRS performance--a vital
goal when resources are limited and public demands are high. 

GPRA requires each agency to develop a strategic plan that lays out
its mission, long-term goals, and strategies for achieving those
goals.  The strategic plans are to take into account the views of
Congress and other stakeholders.  To ensure that these views are
considered, GPRA requires agencies to consult with Congress as they
develop their strategic plans. 

Congress and the administration have both demonstrated that they
recognize that successful consultations are key to the success of
GPRA and therefore to sustained improvements in federal management. 
For IRS, these consultations provide an important opportunity for
Congress, IRS, and Treasury to work together to ensure that IRS'
mission is focused, goals are specific and results oriented, and
strategies and funding expectations are appropriate and reasonable. 
The consultations may prove difficult because they entail a different
working relationship between agencies and Congress than has generally
prevailed in the past.  The consultations are likely to underscore
the competing and conflicting goals of IRS programs, as well as the
sometimes different expectations of the numerous parties involved. 

As a GPRA pilot agency, IRS should be ahead of many federal agencies
in the strategic planning and performance measurement process. 
Nonetheless, IRS remains a long way from being able to ensure that
its budget funds the programs that will contribute the most towards
achieving its mission goals.  While IRS needs more outcome-oriented
indicators, it also has difficulty in measuring its performance with
the indicators it has.  For example, IRS' top indicator is its
Mission Effectiveness Indicator.  This is calculated by subtracting
from the revenue collected the cost of IRS programs and taxpayer
burden and dividing that result by true total tax liability.  While
this approach may be conceptually sound, IRS does not have reliable
data to calculate taxpayer burden nor can it calculate true total tax
liability. 


------------------------------------------------ Chapter STATEMENT:4.1

In summary, there are several questions regarding IRS' fiscal year
1997 spending and IRS' fiscal year 1998 budget request that the
Subcommittee may wish to consider.  Among these are: 

  -- Should the $36 million that IRS will not be using for systems
     development and deployment in fiscal year 1997 be rescinded? 

  -- Should IRS and Treasury be prohibited from spending the $26
     million earmarked for two private debt collection pilot programs
     until issues jeopardizing their success are resolved? 

  -- What level of funding will IRS need to make its information
     systems century date compliant? 

  -- Does IRS need all of the fiscal year 1998 funding it is
     requesting for the Distributed Input System/Remittance
     Processing System replacement project? 

  -- What level of funding should Congress provide for developing new
     information systems, given the lack of any justification for the
     $131 million requested for fiscal year 1998 and the $1 billion
     investment account for fiscal years 1998 and 1999? 

  -- What reliable, outcome-oriented performance measures should be
     put in place to guide IRS and Congress in deciding how many
     resources should be given to IRS and how best to allocate those
     resources among IRS' functional activities? 

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


COMPARISON OF FISCAL YEAR 1998
BUDGET REQUEST WITH PRIOR YEARS
=========================================================== Appendix I

Tables I.1 and I.2, respectively, show how IRS' fiscal year 1998
budget request compares to (1) its proposed fiscal year 1997
operating level and (2) its appropriations since fiscal year 1991. 



                               Table I.1
                
                  Comparison of IRS' Fiscal Year 1998
                Budget Request With Proposed Fiscal Year
                          1997 Operating Level

                         (Dollars in thousands)

                                 Fiscal year 1997    Fiscal year 1998
                                ------------------  ------------------
Budget activity                  Dollars      FTEs   Dollars      FTEs
------------------------------  --------  --------  --------  --------
Submission Processing           $788,138    15,481  $820,325    15,694
Telephone & Correspondence       786,616    20,815   815,382    20,815
Document Matching                 67,298     1,904    69,783     1,904
Inspection                       100,581     1,214   103,874     1,214
Management Services              534,808     7,275   559,355     7,352
Rent & Utilities                 604,416       169   574,455       169
======================================================================
Subtotal: Processing,           2,881,85    46,858  2,943,17    47,148
 Assistance, and Management            7                   4
 Appropriation
Criminal Investigation           371,780     4,595   385,081     4,595
Examination                     1,586,54    25,910  1,641,83    25,916
                                       5                   4
Collection                       715,552    12,387   751,918    12,387
Employee Plans and Exempt        128,116     2,117   132,696     2,117
 Organizations
Statistics of Income              23,756       471    24,781       471
Chief Counsel                    210,469     2,589   217,412     2,589
======================================================================
Subtotal: Tax Law Enforcement   3,036,21    48,069  3,153,72    48,075
 Appropriation                         8                   2
Operational Information         1,156,40     7,708  1,141,59     6,912
 Systems                               8                   6
Developmental Information        130,131       291   130,891       250
 Systems
======================================================================
Subtotal: Information Systems
 Appropriation                  1,286,53     7,999  1,272,48     7,162
                                       9                   7
======================================================================
Grand Total                     7,204,61   102,926  7,369,38   102,385
                                       4                   3
----------------------------------------------------------------------
Source:  IRS' budget estimates for fiscal year 1998. 

We did not extend the above comparison to fiscal years before 1997
because IRS restructured its budget for fiscal year 1998 and adjusted
only its fiscal year 1997 figures to coincide with that new
structure.  One major restructuring involved what used to be the
"Taxpayer Services" budget activity.  That activity, which is part of
IRS' Processing, Assistance, and Management appropriation, was
renamed "Telephone and Correspondence" and was revised to combine
various assistance programs with compliance activities conducted by
phone and correspondence.  Other restructuring included (1) a
consolidation of what were four different resources management budget
activities into a single Management Services activity, (2) creation
of a separate budget activity for rent and utilities, and (3) the
consolidation of what were four information systems budget activities
into two--one for operational systems and one for developmental
systems. 



                               Table I.2
                
                  Comparison of IRS' Fiscal Year 1998
                 Budget Request With IRS Appropriations
                   for Fiscal Years 1991 Through 1997

                         (Dollars in billions)

                                  Appropriation in
Fiscal year                           1997 dollars          Total FTEs
------------------------------  ------------------  ==================
1991                                         7,088             115,628
1992                                         7,513             116,673
1993                                         7,792             113,460
1994                                         7.710             110,665
1995                                         7,826             112,069
1996                                         7,397             106,642
1997                                         7,205             102,926
1998                                       7,182\a           102,385\b
----------------------------------------------------------------------
\a Requested amount. 

\b Estimate based on requested amount. 

Source:  IRS' budget requests for fiscal years 1993 through 1998. 
Dollars are presented in 1997 constant dollars on the basis of GAO
computations using budget request data and Gross Domestic Product
Deflator. 


TRENDS FOR CERTAIN IRS PERFORMANCE
INDICATORS
========================================================== Appendix II

The following tables and figure show trends for various IRS
performance indicators



                               Table II.1
                
                Number of Individual Income Tax Returns
                                 Filed

                             (In millions)

                                                             Number of
                                                     individual income
Fiscal year                                                tax returns
--------------------------------------------------  ------------------
1991                                                             114.1
1992                                                             115.0
1993                                                             114.2
1994                                                             113.4
1995                                                             116.3
1996                                                             118.8
----------------------------------------------------------------------
Source:  IRS annual reports and data books. 



                               Table II.2
                
                      Information Returns Received

                             (In millions)

                                                             Number of
                                                           information
Fiscal year                                                    returns
--------------------------------------------------  ------------------
1991                                                             1,042
1992                                                             1,035
1993                                                             1,040
1994                                                             1,052
1995                                                             1,054
1996                                                             1,070
----------------------------------------------------------------------
Source:  IRS annual reports and data books. 

   Figure II.1:  Telephone
   Accessibility Rates

   (See figure in printed
   edition.)

Note:  Telephone accessibility is computed by dividing the total
number of calls answered by the total number of call attempts, which
we define as the sum of (1) calls answered, (2) busy signals, and (3)
calls abandoned by the caller before an IRS assistor got on the line. 

Source:  IRS' Management Information System for Top Level Executives
and IRS' Telephone Data Reports. 



                               Table II.3
                
                    Audit Coverage of Individual and
                      Corporate Income Tax Returns

                        Individual income tax    Corporate income tax
                               returns                 returns
                        ----------------------  ----------------------
                         Number of     Percent   Number of     Percent
Fiscal year                 audits    coverage      audits    coverage
----------------------  ----------  ----------  ----------  ----------
1991                     1,313,168        1.17      67,618        2.52
1992                     1,206,019        1.06      79,597        3.04
1993                     1,058,966        0.92      79,873        3.05
1994                     1,225,707        1.08      58,110        2.31
1995                     1,919,437      1.67\a      51,808        2.05
1996                     1,941,546        1.67      59,832        2.34
----------------------------------------------------------------------
\a IRS attributes the increase in 1995 to auditors pursuing nonfiler
cases and the increasing number of Earned Income Credit claims
reviewed by service center examination staff. 

Note:  Audit coverage is the number of returns examined divided by
the number of returns filed in the previous calendar year. 

Source:  IRS data books. 



                               Table II.4
                
                   Delinquent Tax Collections by IRS

                         (Dollars in billions)

Fiscal year                        Current dollars        1996 dollars
------------------------------  ------------------  ------------------
1991                                          24.3                27.5
1992                                          24.2                26.6
1993                                          22.8                24.4
1994                                          23.5                24.5
1995                                          25.1                25.7
1996                                          29.8                29.8
----------------------------------------------------------------------
Source:  Current dollars from IRS annual reports and data books. 
1996 dollars are GAO computations using IRS data and gross domestic
product indexes. 


TELEPHONE ACCESSIBILITY
========================================================= Appendix III

During each filing season, millions of taxpayers call IRS with
questions about the tax law, their refunds, or their account. 
According to IRS data, as shown in table III.1, the accessibility of
IRS' telephone assistance, as we have defined it in the past, has
increased substantially.\11



                              Table III.1
                
                    Accessibility of IRS' Telephone
                              Assistance\a

                               Number of      Number of
                                    call          calls
                                attempts       answered        Percent
Filing season              (in millions)  (in millions)  accessibility
-------------------------  -------------  -------------  -------------
1997                                62.4           31.8           50.9
1996                               114.0           22.9           20.1
----------------------------------------------------------------------
\a These data are for January 1 through April 19, 1997, and January 1
through April 20, 1996. 

Source:  IRS data. 

As table III.1 indicates, the increase in accessibility is due to a
combination of more calls being answered and fewer calls coming in. 
IRS' ability to answer more calls is due, at least in part, to (1) an
increase in the number of staff assigned to answer the phone, some of
which was achieved by detailing staff from other IRS functions,\12
and (2) revisions to IRS' procedures for handling calls. 

As an example of the latter, this year, unlike past years, callers
who indicated, through the choices they selected on the automated
telephone menu, that they had a question in a complex tax area (such
as "sale of residence") were to be connected to a voice messaging
system.  Those callers were asked to leave their name, telephone
number, and best time for IRS to call back, and they were told that
someone would be calling back within 2 working days.  Those return
calls were to be made by staff detailed from IRS' Examination
function.  According to IRS, it made this change after a study showed
that several areas of complicated tax law involved 20 to 30 minute
telephone conversations and that an assistor could answer about 5
simpler calls within the same amount of time. 

The decline in the number of calls coming in can be attributed, in no
small part, to IRS' ability to answer more calls.  The more
successful IRS is in answering the phone, the fewer times taxpayers
should have to call in an attempt to get through.  Another factor
cited by IRS as a contributor to the number of call attempts was the
elimination of certain notices that it deemed to be unnecessary,
which, in turn, reduced the need for persons to call IRS with
questions about those notices. 

--------------------
\11 Accessibility, as we have traditionally defined it, is the total
number of calls answered divided by the number of call attempts,
which is the sum of the following:  (1) calls answered, (2) busy
signals, and (3) calls abandoned by the caller before an IRS assistor
got on the line. 

\12 In one service center, for example, 26 staff from the Collection
area were detailed on an as-needed basis to answer the phones, 45
staff from that center's Adjustment/Correspondence Branch were
detailed to answer phone calls during the filing season, and another
24 staff from that Branch were detailed to answer calls for 2 hours
each afternoon. 


*** End of document. ***