Tax Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season,
and Fiscal Year 1998 Budget Request (Testimony, 03/18/97,
GAO/T-GGD/AIMD-97-66).
GAO discussed: (1) its review of the administration's fiscal year (FY)
1998 budget request for the Internal Revenue Service (IRS); (2) the
interim results of its review of the 1997 tax return filing season; (3)
a review of IRS' FY 1997 spending plans for information systems; and (4)
GAO's past work on Tax Systems Modernization.
GAO noted that: (1) IRS' FY 1997 appropriation act and accompanying
conference report indicated that Congress was concerned about, among
other things, the level of taxpayer service and IRS' lack of progress in
modernizing its systems; (2) in response to congressional concerns about
taxpayer service, IRS added more staff this year to answer the telephone
and revised its procedures for handling more complicated calls for
assistance; (3) as a result, IRS answered 52 percent of taxpayers' call
attempts during the first 2 months of this filing season, compared with
21 percent during the same period last year; (4) this filing season has
also seen a large increase in electronic filing; (5) to respond to
congressional concerns about modernization, IRS realigned its FY 1997
information system spending plans; (6) GAO's review of eight projects
showed that the spending plans appeared to be consistent with
congressional direction; (7) however, IRS has since cancelled projects
that it had estimated would cost a total of $36 million in FY 1997, and
decided not to start any new systems modernization efforts until at
least the second quarter of FY 1998; (8) included in IRS' budget request
for FY 1998 is $131 for developmental information systems; (9) in
addition, the administration is proposing a $1-billion capital account
for information technology investments at IRS; (10) neither the $131
million nor the $1 billion is supported by the type of analysis required
by the Clinger-Cohen Act, the Government Performance and Results Act
(GPRA), and the Office of Management and Budget; (11) IRS' budget
request also includes $84 million for its turn-of-the-century date
conversion effort; (12) there is reason to question the sufficiency of
that amount because IRS has not yet determined its total conversion
needs; (13) IRS expects the funding limits it faces in FY 1997 and
anticipates for FY 1998 to continue until at least 2002; (14) fiscal
constraints as well as long-standing concerns about the efficiency of
IRS operations make consensus on IRS strategic goals and the measures
for assessing progress against those goals critically important; (15) in
recent years, Congress has put in place a statutory framework for
accomplishing this; and (16) this framework includes as its essential
elements the Chief Financial Officers Act, the Clinger-Cohen Act, and
GPRA.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-GGD/AIMD-97-66
TITLE: Tax Administration: IRS' Fiscal Year 1997 Spending, 1997
Filing Season, and Fiscal Year 1998 Budget Request
DATE: 03/18/97
SUBJECT: Customer service
Tax returns
Tax administration systems
Electronic forms
Personal income taxes
Systems conversions
Tax refunds
Telephone
Information resources management
Strategic planning
IDENTIFIER: IRS Tax System Modernization Program
TSM
IRS Corporate Accounts Processing System
IRS Integrated Case Processing System
IRS Workload Management System
IRS TeleFile Program
IRS Questionable Refund Program
IRS Distribution Input System
IRS Remittance Processing System
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Cover
================================================================ COVER
Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives
For Release
on Delivery
Expected at
11:00 a.m. EST
Tuesday, March 18, 1997
TAX ADMINISTRATION - IRS' FISCAL
YEAR 1997 SPENDING, 1997 FILING
SEASON, AND FISCAL YEAR 1998
BUDGET REQUEST
Statement of Lynda D. Willis, Director, Tax Policy and
Administration Issues, General Government Division
GAO/T-GGD/AIMD-97-66
GAO/GGD/AIMD-97-66T
(268780)
Abbreviations
=============================================================== ABBREV
CIO - Chief Information Officer
FTE - full-time equivalent
GPRA - Government Performance and Results Act
IRS - Internal Revenue Service
OMB - Office of Management and Budget
SSN - Social Security Number
TSM - Tax Systems Modernization
TAX ADMINISTRATION: IRS' FISCAL
YEAR 1997 SPENDING, 1997 FILING
SEASON, AND FISCAL YEAR 1998
BUDGET REQUEST
====================================================== Chapter SUMMARY
IRS' fiscal year 1997 appropriation act and accompanying conference
report indicated that Congress was concerned about, among other
things, the level of taxpayer service and IRS' lack of progress in
modernizing its systems.
In response to congressional concerns about taxpayer service, IRS
added more staff this year to answer the telephone and revised its
procedures for handling more complicated calls for assistance. As a
result, IRS answered 52 percent of taxpayers' call attempts during
the first 2 months of this filing season, compared with 21 percent
during the same period last year. This filing season has also seen a
large increase in electronic filing.
To respond to congressional concerns about modernization, IRS
realigned its fiscal year 1997 information system spending plans.
GAO's review of eight projects showed that the spending plans
appeared to be consistent with congressional direction. However, IRS
(1) has since cancelled projects that it had estimated would cost a
total of $36 million in fiscal year 1997 and (2) decided not to begin
acquiring and developing new systems for another 12 to 18 months.
Therefore, Congress should consider rescinding the $36 million.
Included in IRS' budget request for fiscal year 1998 is $131 million
for developmental information systems. In addition, the
administration is proposing a $1 billion capital account for
information technology investments at IRS. Neither the $131 million
or the $1 billion is supported by the type of analysis required by
Clinger-Cohen Act, the Government Performance and Results Act, and
the Office of Management and Budget. Congress should consider not
funding either the $131 million request or the capital account until
management and technical weaknesses in IRS' modernization program are
resolved and required justifications are completed. IRS' budget
request also includes $84 million for its turn of the century date
conversion effort. There is reason to question the sufficiency of
that amount because IRS has not yet determined its total conversion
needs.
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. In recent years, Congress has put in place a
statutory framework for accomplishing this. This framework includes
as its essential elements the Chief Financial Officers Act; the
Clinger-Cohen Act; and the Government Performance and Results Act.
TAX ADMINISTRATION: IRS' FISCAL
YEAR 1997 SPENDING, 1997 FILING
SEASON, AND FISCAL YEAR 1998
BUDGET REQUEST
==================================================== Chapter STATEMENT
Madam 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) actions to
implement its fiscal year 1997 appropriation, the status of the 1997
tax return filing season, and the administration's fiscal year 1998
budget request for IRS.
This statement is based on our review of the administration's fiscal
year 1998 budget request, the interim results of our review of the
1997 tax return filing season, a review of IRS' fiscal year 1997
spending plans for information systems, and our past work on Tax
Systems Modernization (TSM).
Our statement makes the following points:
-- IRS' fiscal year 1997 appropriation act and accompanying
conference report indicated that Congress was concerned about,
among other things, the level of taxpayer service and the lack
of progress in implementing TSM. In response to congressional
concerns and direction, IRS allocated about 1,000 additional
full-time equivalent (FTE) staff to taxpayer service activities
and realigned its fiscal year 1997 information system 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.
-- The 1997 filing season has seen significant increases in two
areas where we have criticized IRS' performance in the
past--electronic filing and telephone accessibility. To help
achieve those increases, IRS (1) revised the tax package sent to
persons eligible to file by telephone, hoping, as a result, to
encourage them to file by phone; (2) assigned more staff to
answer the phone; and (3) revised its procedures for handling
more complicated telephone requests for assistance.
-- IRS' basic budget request for fiscal year 1998 is for $7.4
billion and 102,385 FTEs. Included in that request is $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 (GPRA), and the Office of Management
and Budget (OMB).
-- 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 extra money is
being spent on those replacement systems in 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
Government Performance and Results Act provide a mechanism for
accomplishing this.
OVERVIEW OF 1997 APPROPRIATION
ISSUES
-------------------------------------------------- Chapter STATEMENT:1
IRS' fiscal year 1997 appropriation act\1 and accompanying conference
report\2 indicated that Congress was concerned about various aspects
of IRS' operations. Among other things, Congress expressed concern
about (1) 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; (4) the need to maintain
taxpayer service at fiscal year 1995 levels, at a minimum;\3 and (5)
the need to develop a strategic plan and performance measures for
inclusion in IRS' fiscal year 1998 budget request.
As shown in table 1, IRS' final appropriation for fiscal year 1997
was $7.2 billion--$142 million less than its fiscal year 1996
appropriation. The fiscal year 1997 appropriation also rescinded
about $174 million in information systems funds. Table 1 also shows
that the fiscal year 1997 appropriation provided (1) all of what IRS
requested for processing, assistance, and management; (2) $424
million less than requested for tax law enforcement; and (3) $365
million less than requested for information systems.
Table 1
IRS' Fiscal Year 1997 Appropriation
Compared to Its Fiscal Year 1997 Budget
Request and Fiscal Year 1996
Appropriation
(In billions)
Fiscal year Fiscal year
1996 Fiscal year 1997
appropriati 1997 budget appropriati
Appropriation account on request on
------------------------------- ----------- ----------- -----------
Processing, assistance, and $1.724 $1.780 $1.780
management
Tax law enforcement 4.097 4.528 4.104
Information 1.527 1.688 1.323
systems
======================================================================
Total\a $7.348 $7.995 $7.206
----------------------------------------------------------------------
\a Totals may not add due to rounding.
Source: P.L. 104-52, fiscal year 1997 President's budget request
for IRS, and P.L. 104-208.
In response to its fiscal year 1997 appropriation and the
congressional direction specified therein, IRS (1) revised its
spending plans for information systems; (2) reallocated resources
within the processing, assistance, and management account to direct
more resources to taxpayer service activities; and (3) reduced the
number of compliance staff.
--------------------
\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 ARE
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 also found that IRS has ongoing or
completed over one-half of the projects (with fiscal year 1997 costs
totaling about $87.3 million) that were used to justify the
allocation of $130.1 million for systems development and deployment.
IRS is reviewing one other project for $7 million and has canceled
the remaining 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 does not plan to start any new system
development projects until it has developed the internal capability
needed to effectively manage system development projects, which
includes developing a modernization systems architecture and a
systems deployment plan. The CIO said that it would be 12 to 18
months before IRS begins acquiring and developing new systems.
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' current
downsizing plans include 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 our annual
filing season 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. To augment that increase,
IRS has also been detailing staff from other functions to help answer
the phone, including staff who would normally be doing compliance
work. As discussed later, this increased staffing, along with other
steps IRS took, seem to have succeeded in significantly improving
telephone accessibility this 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).
IRS REDUCED COMPLIANCE STAFF
IN 1997 TO ACCOMMODATE
ROLL-OVER OF 1996 FUNDING
------------------------------------------------ Chapter STATEMENT:1.3
The fiscal year 1997 appropriation for tax law enforcement was
essentially a roll-over of the 1996 appropriation. However, IRS, in
its budget request for 1997, said that it needed an increase of $116
million just to "maintain current levels" for enforcement. According
to IRS, getting a roll-over in funding for 1997 rather than an
increase forced it to reduce staffing levels for compliance
activities so it could pay on-board staff. Specifically, IRS reduced
certain compliance positions (i.e., revenue agents and revenue
officers) by more than 1,000. As one result of this reduction, IRS
estimates that audit coverage will drop from 1.6 percent to 1.2
percent. We should note, however, that these reductions were
directed at those enforcement staff that IRS has characterized as
"representing the least efficient use of IRS resources on the
margin."
THE 1997 FILING SEASON
-------------------------------------------------- Chapter STATEMENT:2
By various statistical measures traditionally used to assess a filing
season, the 1997 filing season is going well. Especially noteworthy
are significant increases in electronic filing and telephone
accessibility. One major change this year involves a new procedure
IRS is using to deal with returns that have missing or incorrect
Social Security Numbers (SSN). However, the impact of this procedure
will not be evident until after the filing season. Another area that
we cannot address at this time is refund fraud. IRS had not compiled
data on the number of fraudulent returns and refunds identified this
year as of the time we prepared this testimony.
SIGNIFICANT INCREASES IN
ELECTRONIC FILING AND
TELEPHONE ACCESSIBILITY
------------------------------------------------ Chapter STATEMENT:2.1
As of March 7, 1997, the number of returns filed electronically,
including those filed over the telephone, was 24.7 percent more than
at the same time last year. This increase is even more significant
considering, as shown in table 2, that the total number of individual
income tax returns filed as of March 7, 1997, was 1.5 percent less
than at the same time last year.
Table 2
Individual Income Tax Returns Received
March 7, March 8, Percent of
Type of filing 1997 1996 change
----------------------------- ----------- ----------- -------------
Traditional 28,057,000 31,980,000 -12.3
paper
1040PC\a 2,746,000 2,373,000 15.7
======================================================================
Total Paper 30,803,000 34,353,000 -10.3
Traditional electronic\b 10,921,000 9,273,000 17.8
TeleFile 3,495,000 2,284,000 53.0
======================================================================
Total Electronic 14,416,000 11,557,000 24.7
======================================================================
Total 45,219,000 45,910,000 -1.5
----------------------------------------------------------------------
\a Under the Form 1040PC method of filing, taxpayers or tax return
preparers use personal computer software that produces paper tax
returns in answer-sheet format. The Form 1040PC shows the tax return
line and the data on that line. Only lines on which the taxpayer has
made an entry are included on the Form 1040PC.
\b Traditional electronic returns are those that are filed through
third parties, such as tax return preparers.
Source: IRS' Management Information System for Top Level Executives.
As table 2 shows, the largest percentage increase is in the number of
returns filed by telephone (i.e., TeleFile). That increase may be
due, in large part, to a change in the tax package IRS sent eligible
TeleFile users this year. In past years, IRS sent taxpayers who
appeared eligible to use TeleFile a package that included not only
TeleFile materials but also a Form 1040EZ and related instructions.
Thus, taxpayers who could not or did not want to use TeleFile had the
materials they needed to file on paper, assuming they were still
eligible to file a Form 1040EZ. This year, IRS eliminated the Form
1040EZ and related instructions from the package sent eligible
TeleFile users--hoping that more taxpayers would be inclined to use
TeleFile if they only received the TeleFile materials.
A second noteworthy trend this year is an increase in the ability of
taxpayers who have questions about the tax law, their refunds, or
their account to reach IRS by telephone. As shown in table 3, the
accessibility of IRS' telephone assistance, as we have defined it in
the past, has increased substantially.\5
Table 3
Accessibility of IRS' Telephone
Assistance\a
Number of Number of
call calls Percent
attempts answered accessibili
Filing season (in millions) (in millions) ty
--------------------------- ------------- ------------- -----------
1997 21.6 11.3 52.3
1996 42.3 9.0 21.3
----------------------------------------------------------------------
\a These data are for January 1 through February 22, 1997, and
January 1 through February 24, 1996.
Source: IRS data.
As table 3 indicates, the increase in accessibility is due to a
combination of fewer calls coming in and more calls being answered.
The two factors are not unrelated. The more successful IRS is in
answering the phone, the fewer times taxpayers should have to call in
an attempt to get through.
IRS has another way of measuring accessibility, called "level of
access", which tracks the percentage of callers who were eventually
able to get through to IRS rather than the number of call attempts.
As of February 22, 1997, according to IRS data, the level of access
was 71 percent, a substantial increase over the 52-percent level of
access as of the same time last year.
There are several factors that appear to have contributed to IRS'
increased telephone service: (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;\6 (2) an attempt to reduce the need
for persons to call IRS by eliminating certain notices that IRS
deemed to be unnecessary; and (3) revisions to IRS' procedures for
handling calls.
As an example of the latter, this year, unlike past years, callers
who indicate, through the choices they select on the automated
telephone menu, that they have a question in a complex tax area (such
as "sale of residence") are to be connected to a voice messaging
system. Those callers are asked to leave their name, telephone
number, and best time for IRS to call back, and they are told that
someone will be calling back within 2 working days. Those return
calls are being 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.
--------------------
\5 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.
\6 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 have been
detailed to answer phone calls during the filing season, and another
24 staff from that Branch have been detailed to answer calls for 2
hours each afternoon.
TOO SOON TO ASSESS IMPACT OF
IRS' NEW SSN PROCEDURE
------------------------------------------------ Chapter STATEMENT:2.2
One important change this filing season involves the way IRS is
handling returns filed with missing or incorrect SSNs. Over the last
few years, when IRS identified a missing or invalid SSN, it delayed
the taxpayer's refund and corresponded with the taxpayer to resolve
the issue. As we noted in our report to the Subcommittee on the 1996
filing season, IRS was unable to pursue many of the problem SSNs it
identified under those procedures.\7
Effective with this filing season, IRS was given the legislative
authority to treat missing or invalid SSNs as an error made by the
taxpayer, similar to the way IRS handles math errors. Under that new
authority, when IRS detects a missing or invalid SSN, it is to
disallow any related deductions and credits and adjust the taxpayer's
tax liability.
For example, if a taxpayer claims one dependent and the child care
credit, but lists an invalid SSN for the dependent, IRS is to
increase the taxable income by the personal exemption amount claimed
for the dependent and not allow the child care credit. IRS is then
to adjust the taxpayer's tax liability and reduce the taxpayer's
refund, if any. The taxpayer is to receive a notice explaining the
changes to his or her tax liability and refund. The standard notice
IRS is using provides a special toll-free telephone number that
taxpayers can call if they want to discuss the changes and/or provide
corrected information to support their claims. Taxpayers can also
write to IRS to resolve the issue.
IRS estimated that about 2.4 million taxpayers will receive these
"SSN-math error" notices in 1997. According to an IRS official, IRS
had issued about 70,000 such notices as of February 21, 1997. At the
time we prepared this testimony, officials at three IRS customer
service centers, which are responsible for answering taxpayers'
inquiries, told us that assistors were not yet getting many calls or
letters from taxpayers who received the notices. Thus, it is too
early to assess the impact of this new procedure.
--------------------
\7 IRS' 1996 Tax Filing Season: Performance Goals Generally Met;
Efforts to Modernize Had Mixed Results (GAO/GGD-97-25, Dec. 18,
1996).
DATA NOT YET AVAILABLE ON
REFUND FRAUD
------------------------------------------------ Chapter STATEMENT:2.3
As we noted in our report on the 1996 filing season, IRS identified
many fewer fraudulent returns last year than it did in 1995.
According to IRS, the decline was due to a 31-percent staffing
decrease in IRS' Questionable Refund Program. Program officials told
us that the reduced level of staffing has continued in 1997.
However, we do not know how the reduced staffing has affected the
number of fraudulent returns and refunds identified this year because
IRS had not compiled that data as of the time we prepared this
testimony.
FISCAL YEAR 1998 BUDGET REQUEST
FOR INFORMATION SYSTEMS RAISES
SEVERAL QUESTIONS
-------------------------------------------------- Chapter STATEMENT:3
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, GPRA, 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?
BUDGET REQUEST FOR SYSTEMS
DEVELOPMENT NOT JUSTIFIED
------------------------------------------------ Chapter STATEMENT:3.1
The Clinger-Cohen Act, GPRA, 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. The budget request states that
IRS does not know how it plans to spend these funds because its
modernization systems architecture and system deployment plan have
not yet been finalized. These efforts are scheduled for completion
in May 1997 and are intended to guide future systems development.
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.
NO JUSTIFICATION TO SUPPORT
BILLION DOLLAR INFORMATION
TECHNOLOGY INVESTMENTS
ACCOUNT
------------------------------------------------ Chapter STATEMENT:3.2
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, and no funds will be
obligated before July 1, 1998.
The Clinger-Cohen Act, GPRA, 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.
In 1995 we made over a dozen recommendations to the Commissioner of
Internal Revenue to address systems modernization management and
technical weaknesses.\8 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.\9 Since then, IRS has
continued to address our recommendations and respond to congressional
direction. But, there is still no evidence that any of the
recommendations have been fully implemented and, as we reported in
February 1997, IRS' systems modernization effort continues to be at
risk.\10 Much remains to be done to implement essential improvements
in IRS' modernization efforts. IRS has not yet instituted
disciplined processes for designing and developing new systems and
has not yet completed its systems architecture.
--------------------
\8 Tax Systems Modernization: Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156,
July 26, 1995).
\9 Tax Systems Modernization: Actions Underway But IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June
7, 1996).
\10 GAO High-Risk Series, IRS Management (GAO/HR-97-8, Feb. 1997).
------------------------------------------------ Chapter STATEMENT:3.3
Given IRS' poor track record delivering cost-beneficial TSM systems,
persisting weaknesses in both software development and acquisition
capabilities, and the lack of justification and analyses for proposed
system expenditures, Congress should consider not funding either the
$131 million request for systems development or 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:3.4
IRS, like other federal agencies, is in the midst of a major project
aimed at making its computer systems "century date compliant."
Currently, IRS' computer systems can not distinguish between the
years 1900 and 2000 because the systems year is represented by
two-digit date fields (i.e., 00 in both cases). 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' fiscal year 1998 budget request includes $84 million for the
century date change effort, an increase of $39 million over the $45
million included for that effort in IRS' fiscal year 1997 budget.
However, 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. The request did
not include estimates for IRS' secondary tax processing systems that
are also critical to the tax administration process. It also did not
factor in many other activities related to the century date change
effort that have since been identified, such as the need for
additional hardware and software for testing, operating system
upgrades, and possibly additional storage capacity due to expanded
date fields.
Thus far in fiscal year 1997, IRS has identified requirements for the
century date conversion that would exceed its fiscal year 1997 budget
by as much as $49.5 million. Of this amount, $13.5 million is for
additional labor costs and the remaining $36 million is for nonlabor
costs (i.e., the purchase of updated operating system environments,
contractor support for software conversion and testing, and
additional hardware for expected capacity increases). IRS'
Investment Review Board recently approved a request for these
additional funds. However, according to IRS budget officials, a
funding source has not been identified. Once that source is
identified, they said they plan to notify the Appropriations
Committees.
IRS is currently assessing what it needs to do to make its main tax
processing systems century date compliant and what that will cost.
However, there are other potentially significant project costs,
including those associated with converting and testing secondary tax
processing systems. IRS project officials told us that they hope to
have a complete cost estimate for the century date conversion effort
by this summer. In the meantime, given the status of IRS' needs
assessment, it seems reasonable to question whether the amount
requested for this effort in fiscal year 1998 will be sufficient.
REPLACEMENT OF SYSTEMS THAT
PROCESS PAPER TAX RETURNS
AND REMITTANCES
------------------------------------------------ Chapter STATEMENT:3.5
Also as part of its information systems request, IRS is asking for a
$35 million increase over the $9 million it received in fiscal year
1997 to replace 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). IRS reports that the systems are unreliable, costly to
operate and maintain, and not year 2000 compliant. IRS is requesting
$44 million for fiscal year 1998 to develop a replacement for these
two systems and begin pilot testing in January 1998.
Project officials told us that to meet the January 1998 milestone for
piloting the new systems, they accelerated the project schedule. As
a result, they requested and the Investment Review Board approved, on
March 4, 1997, an additional $11.8 million--$5.7 million for fiscal
year 1997 requirements and $6.1 million for fiscal year 1998
requirements. 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:4
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.
Part of the explanation for the smaller-than-expected savings is 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 IRS needs to resolve various issues that adversely
affect the appeal of electronic filing.\11 One of those issues is the
need to submit paper documents with an electronic return.
--------------------
\11 Tax Administration: Opportunities to Increase the Use of
Electronic Filing (GAO/GGD-93-40, Jan. 22, 1993).
CHALLENGES FOR THE FUTURE
-------------------------------------------------- Chapter STATEMENT:5
Probably the most noteworthy part of IRS' performance during the 1997
filing season to date is the dramatic increase in telephone
accessibility. The improvement, however, is not without cost. IRS
is using various strategies to improve accessibility, one of which
involves detailing staff from other functions 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 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. Our work has 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:5.1
In summary, IRS' 1997 filing season is going very well in two areas
that we have criticized in the past. Telephone accessibility is much
higher and more taxpayers are filing electronically.
Regarding IRS' fiscal year 1997 spending and IRS' fiscal year 1998
budget request, there are several questions that Congress may wish to
consider as it continues its oversight and appropriations activities.
Among these are:
-- Should the $36 million that IRS will not be using for systems
development and deployment in fiscal year 1997 be rescinded?
-- What level of funding will IRS need to make its information
systems century date compliant, and will those changes be made
in time?
-- 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.
*** End of document. ***