Tax Administration: IRS' Fiscal Year 1999 Budget Request and Fiscal Year
1998 Filing Season (Testimony, 03/31/98, GAO/T-GGD/AIMD-98-114).

Pursuant to a congressional request, GAO discussed the administration's
fiscal year (FY) 1999 budget request for the Internal Revenue Service
(IRS) and the status of the 1998 tax return filing season.

GAO noted that: (1) the administration is requesting about $8.3 billion
and 102,000 full-time equivalent (FTE) staff years for IRS in FY 1999;
(2) this is an increase of about $500 million and 1,500 FTEs over IRS'
proposed operating level for FY 1998; (3) the most critical issue IRS
faces this year and next is the need to make its computer systems
century date compliant; (4) the goal is to implement all year 2000
efforts by January 1999 to allow time for testing; (5) IRS' latest
estimates indicate that additional funds will be needed for FY 1998
beyond the amount already available; (6) IRS is also refining its budget
estimates for FY 1999 in light of more current information; (7) for FY
1999, the administration is requesting $323 million for IRS' Information
Technology Investments Account; (8) when combined with the $325 million
appropriated for this account last year, the request would increase the
account's total to $648 million; (9) because $246.5 million of the
request has not been justified on the basis of analytical data or
derived using a verifiable estimating method, GAO believes that Congress
should consider reducing the administration's request by that amount;
(10) the administration's request also includes $103 million to enhance
customer service; (11) IRS plans, among other things, to provide better
telephone service, improve customer service training, strengthen the
Taxpayer Advocate's Office, make it easier to get answers in person, and
improve the clarity of forms and notices--all areas that are critical to
good customer service and that need improvement; (12) each year, IRS
submits detailed budget estimates to support the administration's budget
request; (13) in GAO's opinion, several factors limit the utility of
those budget estimates for oversight purposes; (14) interim data on the
1998 filing season indicate that IRS is continuing to make progress in
two important areas--the use of electronic filing and the ability of
taxpayers to reach IRS by telephone; and (15) although it is too soon to
assess the results of IRS' new initiative to reduce Earned Income Credit
noncompliance, GAO does have some observations on two aspects of that
initiative.

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

 REPORTNUM:  T-GGD/AIMD-98-114
     TITLE:  Tax Administration: IRS' Fiscal Year 1999 Budget Request 
             and Fiscal Year 1998 Filing Season
      DATE:  03/31/98
   SUBJECT:  Systems conversions
             Customer service
             Presidential budgets
             Tax returns
             Taxpayers
             Tax administration systems
             Telephone
             Strategic information systems planning
             Information resources management
             Electronic forms
IDENTIFIER:  IRS Earned Income Credit Compliance Initiative
             IRS Tax System Modernization Program
             IRS Integrated Collection System
             IRS Problem Resolution Program
             TSM
             Earned Income Tax Credit
             IRS TeleFile Program
             EIC
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight, House Committee on Ways and
Means

For Release
on Delivery
Expected at
2:00 p.m.EST
Tuesday
March 31, 1998

TAX ADMINISTRATION - IRS' FISCAL
YEAR 1999 BUDGET REQUEST AND
FISCAL YEAR 1998 FILING SEASON

Statement of Lynda D.  Willis, Director, Tax Policy and
Administration Issues, General Government Division

GAO/T-GGD/AIMD-98-114

GAO/GGD/AIMD-98-114t


(268835)


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

  EIC - Earned Income Credit
  FTE - Full-time equivalent
  IRS - Internal Revenue Service
  ISRP - Integrated Submission and Remittance Processing
  NA - Not available
  OMB - Office of Management and Budget
  PRP - Problem Resolution Program
  TBD - To be determined
  TSM - Tax Systems Modernization

TAX ADMINISTRATION:  IRS' FISCAL
YEAR 1999 BUDGET REQUEST AND 1998
FILING SEASON
====================================================== Chapter SUMMARY

The administration is requesting about $8.3 billion and 102,000
full-time equivalent (FTE) staff years for IRS in fiscal year 1999. 
This is an increase of about $500 million and 1,500 FTEs over IRS'
proposed operating level for fiscal year 1998.  The most critical
issue IRS faces this year and next is the need to make its computer
systems century date compliant.  The goal is to implement all Year
2000 efforts by January 1999 to allow time for testing.  IRS' latest
estimates indicate that additional funds will be needed for fiscal
year 1998 beyond the amount already available.  IRS is also refining
its budget estimates for fiscal year 1999 in light of more current
information. 

For fiscal year 1999, the administration is requesting $323 million
for IRS' "Information Technology Investments Account." When combined
with the $325 million appropriated for this account last year, that
request would increase the account's total to $648 million.  Because
$246.5 million of the request has not been justified on the basis of
analytical data or derived using a verifiable estimating method, GAO
believes that Congress should consider reducing the administration's
request by that amount. 

The administration's request also includes $103 million to enhance
customer service.  IRS plans, among other things, to provide better
telephone service, improve customer service training, strengthen the
Taxpayer Advocate's Office, make it easier to get answers in person,
and improve the clarity of forms and notices--all areas that are
critical to good customer service and that need improvement. 

Each year, IRS submits detailed budget estimates to support the
administration's budget request.  In GAO's opinion, several factors
limit the utility of those budget estimates for oversight purposes. 
For example, the estimates do not provide the kind of information
needed to determine how much of the administration's request is for
taxpayer assistance as opposed to enforcement.  One aspect of IRS'
budget estimates that has improved over the years involves the use of
performance measures.  However, there is still much work to be done
in that area and many challenges to overcome. 

Interim data on the 1998 filing season indicate that IRS is
continuing to make progress in two important areas--the use of
electronic filing and the ability of taxpayers to reach IRS by
telephone.  Although it is too soon to assess the results of IRS' new
initiative to reduce Earned Income Credit noncompliance, GAO does
have some observations on two aspects of that initiative. 


TAX ADMINISTRATION:  IRS' FISCAL
YEAR 1999 BUDGET REQUEST AND 1998
FILING SEASON
==================================================== 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 administration's fiscal year 1999 budget request for
the Internal Revenue Service (IRS) and the status of the 1998 tax
return filing season. 

This statement is based on (1) our review of the administration's
fiscal year 1999 budget request for IRS and supporting documentation,
including IRS' February 2, 1998, budget estimates, which provide
details behind the administration's request; (2) interim results of
our review of the 1998 tax return filing season; (3) our past work on
IRS information systems and performance measures; and (4) our ongoing
reviews of the Taxpayer Advocate's Office, IRS' efforts to reduce
noncompliance associated with the Earned Income Credit (EIC), and
IRS' efforts to make its information systems Year 2000 compliant. 

Our statement makes the following points: 

  -- The most critical issue facing IRS this year and next is the
     need to make its computer systems century-date compliant.  IRS
     received $376.7 million for that effort in fiscal year 1998 and
     is seeking another $234 million for fiscal year 1999.  However,
     IRS' latest estimates indicate that additional funds will be
     needed for fiscal year 1998.  IRS officials are also refining
     their budget estimates for fiscal year 1999 in light of more
     current information. 

  -- As shown in appendix I, the administration's fiscal year 1999
     budget request for IRS totals $8.339 billion and 102,013
     full-time equivalent (FTE) staff years, which are increases of
     $534 million (6.8 percent) and 1,462 FTEs (1.5 percent) over
     IRS' proposed operating level for fiscal year 1998.\1 Included
     in the fiscal year 1999 request is $323 million for the
     information technology investments account.  Because $246.5
     million of that request has not been justified on the basis of
     analytical data or derived using a verifiable estimating method,
     we believe that Congress should consider reducing the
     administration's request by that amount.  We also believe that
     Congress should consider precluding IRS from obligating funds
     from the investments account to develop or acquire modernized
     systems until IRS has defined and implemented mature systems
     life cycle processes.\2

  -- Also included in the fiscal year 1999 budget request is $103
     million and 1,024 FTEs to enhance customer service.  Most of the
     $103 million is to go toward providing better telephone service
     and improving customer service training; smaller amounts are for
     such things as improving walk-in service, strengthening the
     Taxpayer Advocate's Office, and clarifying forms and notices. 
     Each of these areas are important to good customer service and
     are in need of improvement. 

  -- Each year, IRS submits detailed budget estimates to support the
     administration's budget request.  The utility of this
     information for oversight purposes is limited because (1) the
     intermingling of enforcement and assistance resources within
     various budget activities precludes an assessment of the balance
     between those two areas; (2) periodic restructuring of IRS'
     appropriations and the budget activities within those
     appropriations hinders long-term trend analyses; and (3) the
     estimates provide inadequate information on the resources being
     devoted to critical areas, such as the Year 2000 effort and the
     Taxpayer Advocate's Office. 

  -- One aspect of IRS' budget estimates that has improved over the
     years involves the use of performance measures.  However, there
     is still much work to be done and many challenges to overcome. 
     These challenges include (1) developing a reliable measure of
     taxpayer burden, including the portion that IRS can influence;
     (2) developing measures that can be used to compare the
     effectiveness of IRS' various customer service programs; and (3)
     refining or developing new measures that gauge the quality of
     the services provided. 

  -- Data on the first 2 1/2 months of the 1998 filing season
     indicate that IRS is continuing to make progress in two
     important areas--the use of electronic filing and the ability of
     taxpayers to reach IRS by telephone.  This is also the first
     year of a planned 5-year initiative to reduce EIC noncompliance. 
     Although it is too soon to assess the results of this
     initiative, we do have some observations on two aspects of the
     initiative--special assistance being provided to EIC claimants
     and IRS efforts to develop a baseline measure of EIC compliance. 


--------------------
\1 The fiscal year 1999 amounts include the second year of an IRS
initiative to improve compliance with the EIC.  Like the first year,
the second year is to be funded outside the spending caps. 

\2 A systems life cycle defines the policies, processes, and products
for managing information technology investments from conception,
development, and deployment through maintenance and support. 


   YEAR 2000:  FISCAL YEAR 1998
   FUNDING INCREASES IDENTIFIED;
   FISCAL YEAR 1999 NEEDS BEING
   REFINED
-------------------------------------------------- Chapter STATEMENT:1

IRS, like other federal agencies, has to make 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 1900 and 2000 (both years
would be shown as "00").  IRS estimates that failure to correct this
situation before 2000 could result in millions of erroneous tax
notices, refunds, and bills.  Accordingly, the Commissioner of
Internal Revenue has designated this effort a top priority. 

To make its systems Year 2000 compliant, IRS plans to (1) convert
existing systems by modifying application software and data and
upgrading hardware and system software where needed; (2) replace
systems if correcting them is not cost-beneficial or technically
feasible; and (3) retire other systems if they will not be needed
after the year 2000.  IRS' Year 2000 effort includes the following
two major system replacement efforts: 

  -- IRS is replacing its primary tax return and remittance input
     processing systems (i.e., the Distributed Input Processing
     System and the Remittance Processing System) with a single
     system, the Integrated Submission and Remittance Processing
     System (ISRP).  This new system is being piloted at the Austin
     Service Center.  If the pilot is successful, IRS expects to
     begin rolling the system out to other service centers later this
     year. 

  -- IRS is consolidating its mainframe computer processing
     operations from 10 service centers to 2 computing centers.  This
     consolidation is to replace the computer hardware, systems
     software, and telecommunications infrastructure for most of IRS'
     primary tax processing systems.\3

IRS' goal is to implement all Year 2000 efforts by January 1999.  IRS
established this goal so that (1) Year 2000 changes would be
implemented before the start of the 1999 filing season and (2) IRS
could conduct an extensive systemic test of tax data transactions
through IRS' mission critical systems in a Year 2000 environment to
simulate how systems are likely to function and interact on or after
January 1, 2000.\4

As of March 1998, IRS estimated that the cost of its Year 2000 effort
for fiscal years 1997 through 2001 would be about $925 million.  IRS
received $376.7 million for this effort in fiscal year 1998 and is
seeking another $234 million for fiscal year 1999.  IRS' latest
estimates indicate that additional funds will be needed for fiscal
year 1998.  IRS officials are also refining their estimates for
fiscal year 1999 in light of more current information. 


--------------------
\3 Two parts of mainframe consolidation are critical to Year 2000
compliance:  (1) replacing the Communication Replacement System,
which provides communications and security management and oversight
for on-line account databases, and (2) replacing 16,000 terminals
that support front-line customer service and compliance operations. 
IRS decided to undertake a larger consolidation effort because it
concluded that consolidation would (1) satisfy Office of Management
and Budget (OMB) Bulletin 96-02, which directs agencies to
consolidate information processing centers; (2) be consistent with
IRS' planned modernization architecture; and (3) save an estimated
$356 million from fiscal year 1997 through fiscal year 2003. 

\4 A Year 2000 environment means that system date clocks and tax data
being used in the test are given dates of January 1, 2000, or later. 


      ADDITIONAL NEEDS IDENTIFIED
      FOR FISCAL YEAR 1998
------------------------------------------------ Chapter STATEMENT:1.1

Table 1 shows how the $376.7 million IRS received for Year 2000
efforts in fiscal year 1998 was allocated among various spending
categories.




                                Table 1
                
                IRS' Fiscal Year 1998 Appropriation for
                           Year 2000 Efforts

Spending category                                 Amount (in millions)
----------------------------------------------  ----------------------
Conversion of existing systems
Conversion and testing                                            79.0
Telecommunications                                                23.0
ADP equipment                                                     13.0
Operating systems software                                        17.0
Year 2000 project office                                           9.0
Certification                                                      7.0
Contingency amount                                                42.0
Offset within IRS' budget\a                                      -20.0
======================================================================
Subtotal                                                         170.0
Mainframe consolidation                                        157.7\b
ISRP                                                              49.0
======================================================================
Total                                                           $376.7
----------------------------------------------------------------------
Note:  Of the $376.7 million, Congress appropriated $289 million and
authorized IRS to reprogram the rest from fiscal year 1997 and 1996
Tax Systems Modernization funds. 

\a IRS was to identify $20 million from other programs to cover Year
2000 costs. 

\b This amount includes the costs for all aspects of consolidation,
not just the portion that is necessary for Year 2000 compliance. 
Congress provided an additional $7 million to relocate and retrain
employees who might be affected by the mainframe consolidation
project. 

Source:  Except for ISRP, the information in table 1 is from House
Conference Report 105-284, September 29, 1997.  ISRP information is
from IRS' report to Congress on the status of its Year 2000 effort as
of October 1, 1997. 

As table 1 shows, most of the $376.7 million is to convert existing
systems and consolidate mainframes.  As discussed below, IRS
officials have identified additional funding needs for fiscal year
1998 for the conversion of existing systems and are pursuing options
for meeting those needs.  Funding needs for mainframe consolidation
will be more definite when IRS completes contract negotiations for
this project. 


         CONVERSION OF EXISTING
         SYSTEMS
---------------------------------------------- Chapter STATEMENT:1.1.1

IRS' fiscal year 1998 appropriation provided $170 million to convert
existing systems.  However, IRS officials estimate that an additional
$60 to $70 million will be needed for this purpose in 1998.  In part,
that increase reflects the approach IRS used to assess the scope of
its Year 2000 conversion work. 

IRS has three tiers of computing operations--mainframe computers,
minicomputers and file servers, and personal computers.  IRS focused
its initial Year 2000 efforts on assessing and converting its
mainframe computer operations that are largely controlled by IRS'
Chief Information Officer and encompass most of IRS' key tax
processing systems.  Assessments for the two other tiers and
telecommunications systems, not all of which are under the control of
the Chief Information Officer, started late and were delayed, in
part, because IRS did not have a complete inventory for these areas. 
Since receiving its fiscal year 1998 appropriation, IRS has been
trying to complete its inventory and refine its cost estimates for
these information systems areas as well as for non-information
systems, such as building facilities and security.  Thus far in
fiscal year 1998, IRS has (1) reallocated funds among the spending
categories identified in the fiscal year 1998 appropriation, (2)
identified specific needs for the $42 million initially set aside for
contingencies, and (3) identified additional needs of about $60 to
$70 million that are not yet funded.  IRS notified the Appropriations
Committees of these additional needs in its Year 2000 status report
for the first quarter of fiscal year 1998. 

According to IRS budget officials, IRS anticipates that it can meet
most of the $60 to $70 million shortfall from two sources.  First,
the Department of the Treasury plans to submit a reprogramming letter
to Congress, which will include a transfer request for IRS, in
accordance with the President's February 20, 1998, supplemental
budget request for fiscal year 1998.\5 According to IRS budget
officials, IRS' request will call for transferring up to $50 million
from unobligated balances from prior fiscal years' expired accounts. 
Second, according to IRS and Treasury officials, Treasury plans to
fund up to $29 million in Treasury-wide telecommunications costs that
IRS had previously factored into its base funding of $170 million. 
As a result, part of the base funding that was allocated to
telecommunications costs will be available for other Year 2000
conversion work. 


--------------------
\5 The President's February 20, 1998, supplemental budget request
covers several departments.  For the Department of the Treasury, the
request asks for authority to transfer up to $250 million among
Department accounts as well as authority to extend the availability
of unobligated balances existing at the end of fiscal year 1998 to
address the challenges associated with the Year 2000 effort. 
According to IRS and Treasury budget officials, IRS, unlike other
Treasury bureaus, already has authority to extend the availability of
unobligated balances. 


         MAINFRAME CONSOLIDATION
---------------------------------------------- Chapter STATEMENT:1.1.2

IRS' fiscal year 1998 appropriation for mainframe consolidation was
$157.7 million.  Congress also provided $7 million to relocate and
retrain IRS employees who might be affected by the consolidation. 
According to officials from IRS' mainframe consolidation project
office, the contractor's latest cost proposal for fiscal year 1998 is
$195.2 million--$37.5 million more than the amount appropriated. 
However, project office officials said that they do not consider the
$37.5 million a funding shortfall because some of the work that is
included in the contractor's fiscal year 1998 proposal was started in
1997 and funded with fiscal year 1997 funds.  According to documents
prepared for the Commissioner's Executive Committee on Century Date
Change and the 1999 Filing Season, the fiscal year 1998 budget for
mainframe consolidation will remain uncertain until the completion of
(1) contract negotiations and (2) the project office's validation of
fiscal year 1998 budget requirements. 


      FISCAL YEAR 1999 REQUEST IS
      BEING REFINED
------------------------------------------------ Chapter STATEMENT:1.2

The budget request for fiscal year 1999 includes $1.42 billion for
operational information systems.  According to IRS, $234 million of
that request is for Year 2000 efforts--about $143 million less than
the 1998 appropriation.  Most of the $234 million is for Year 2000
work on existing systems ($140 million) and mainframe consolidation
($76 million).  The rest ($18 million) is for ISRP.  On the basis of
information we obtained in mid-March 1998, IRS is refining its
allocations of the $140 million for the conversion of existing
systems.  The funding requirements for mainframe consolidation could
increase in light of expanded business requirements and schedule
changes. 


         CONVERSION OF EXISTING
         SYSTEMS
---------------------------------------------- Chapter STATEMENT:1.2.1

At the time we prepared this statement, Year 2000 project office
officials were refining their allocations of the $140 million
included in the fiscal year 1999 budget request for the conversion of
existing systems.  According to information we obtained in mid-March,
the largest spending categories for fiscal year 1999 are testing ($58
million); contractor support to the Year 2000 project office ($20
million); and IRS salary costs ($24 million).  Although we cannot
comment on the adequacy of these amounts, IRS has allocated a large
portion of its request to testing, which is what we would have
expected based on IRS' conversion plans and schedule.  However, we
are concerned that IRS has not fully assessed the impact of not
including all mission critical systems in a major test it is to
conduct in fiscal year 1999. 

IRS' plans call for completing all hardware and software upgrades and
the conversion and testing of individual applications by January
1999.  Beginning in January 1999, IRS plans to start what it refers
to as systemic testing at Year 2000 test facilities.  This test is to
simulate how various tax data transactions will move through mission
critical systems in a Year 2000 environment. 

At the time we prepared this statement, IRS officials said that they
had received a contractor's cost proposal of about $30 million for a
systemic test and that the contractor's proposal is reflected in IRS'
budget request for fiscal year 1999.  Under this proposal, the test
is to include 39 of the 126 mission critical systems IRS has
identified.  Officials responsible for overseeing this test said that
they believe these 39 systems affect the vast majority of taxpayers. 
IRS officials said that although they are still negotiating with the
contractor to increase the number of mission critical systems that
will be included in the systemic test, not all 126 will be included. 

The century date change project office Director said that those
systems that are not included in the systemic test will undergo
testing individually in a Year 2000 environment.  We did not assess
whether in fact the 39 systems that are included in the contractor's
proposal affect the vast majority of taxpayers and thus may be more
important to include in the test than other mission critical systems. 
We are concerned, however, that IRS has not fully assessed the impact
of not including the other mission critical systems and the
associated risks.  We are also concerned that IRS has not identified
the total resources needed for testing mission critical systems that
are not included in the systemic test.  The century date change
project office Director said total resource requirements for such
testing may not be known for another 6 months. 


         MAINFRAME CONSOLIDATION
---------------------------------------------- Chapter STATEMENT:1.2.2

The fiscal year 1999 budget request also includes $76 million for
mainframe consolidation--about $89 million less than in fiscal year
1998.  According to mainframe consolidation project office officials,
the $76 million represents IRS' estimate of contractor costs at the
time the budget request was prepared.  According to the officials,
several factors (final contract negotiations, an expanded set of
business requirements, ergonomic furniture requirements, and a
slippage in the original completion schedule) could increase the
fiscal year 1999 funding requirements for mainframe consolidation. 

According to mainframe consolidation project officials, IRS has
received the contractor's cost proposal, which is about $7.3 million
higher than IRS' initial estimate.  In addition, IRS has asked the
contractor to provide cost estimates for an expanded set of business
requirements relating to security, disaster recovery, and testing in
response to an ongoing initiative within IRS' Information Systems
organization.  Those estimates were not available to us when we
prepared this statement.  Project office officials also said that
additional funds will be needed for ergonomic furniture as a result
of IRS' February 19, 1998, agreement with the National Treasury
Employees Union.  The officials estimated that this furniture will
cost about $8 million in fiscal year 1999. 

In addition to expanded business requirements, additional contractor
costs may arise if IRS does not meet its original completion schedule
for mainframe consolidation.  According to IRS' plans, all 10 service
centers were to be consolidated by December 1998.  The Memphis
Service Center was consolidated in December 1997.  However, because
of field office concerns about the ambitious consolidation schedule
and pending expanded business requirements, IRS is reassessing its
schedule for the other nine centers.  IRS is considering the
following three consolidation options:  (1) three centers in 1998 and
six in 1999, (2) four centers in 1998 and five in 1999, or (3) five
centers in 1998 and four in 1999.  Because IRS has decided not to
consolidate any service center during the filing season,
consolidations would not start until June.  Under this scenario, it
is likely that IRS would incur additional costs by having to retain
the contractor through most of calendar year 1999. 

Thus, the budget for mainframe consolidation will remain uncertain
until IRS (1) makes final decisions on which expanded business
requirements will be implemented, (2) identifies the number of
service centers that will be consolidated in 1998 and 1999, and (3)
completes contract negotiations.  IRS' goal is to complete
negotiations by May 1, 1998. 


   CONGRESS SHOULD CONSIDER
   REDUCING AND RESTRICTING FUNDS
   REQUESTED FOR INFORMATION
   TECHNOLOGY
-------------------------------------------------- Chapter STATEMENT:2

The administration's fiscal year 1999 budget request includes $1.54
billion and 7,493 FTEs for IRS' Information Systems appropriation. 
Of this $1.54 billion, $1.42 billion is to fund "Operational Systems"
(i.e., the operation and maintenance of existing systems), and $125
million is to fund "Developmental Systems" (i.e., new systems that
are intended to sustain IRS' operations until modernization plans are
implemented).  IRS' proposed categories of spending under this
appropriation request are consistent with our recent recommendations
and related congressional actions. 

In addition to the $1.54 billion, the administration is requesting
$323 million for IRS' multiyear capital account for systems
modernization investments, referred to as the "Information Technology
Investments Account." IRS has not adequately justified $246.5 million
of this request.  We also question IRS' readiness to obligate funds
in this investment account for the purpose of building or acquiring
modernized systems because IRS has yet to complete and implement
mature systems life cycle processes. 


      GAO RECOMMENDATIONS AND
      LEGISLATION HAVE
      SUCCESSFULLY RESTRICTED IRS'
      SPENDING AND FUNDING
      REQUESTS FOR INFORMATION
      SYSTEMS
------------------------------------------------ Chapter STATEMENT:2.1

In June 1996, we reported that although IRS had initiated a number of
actions to respond to our recommendations for correcting pervasive
management and technical weaknesses in its Tax Systems Modernization
(TSM) program, many of these actions were incomplete, and none,
either individually or collectively, responded fully to any of our
recommendations.\6 Accordingly, we suggested that Congress consider
limiting TSM spending to cost-effective efforts that (1) support
ongoing operations and maintenance (e.g., Year 2000 efforts); (2)
correct pervasive management and technical weaknesses, such as a lack
of requisite systems life cycle discipline; (3) are small, represent
low technical risk, and can be delivered in a relatively short time
frame; or (4) involve deploying already developed systems that have
been fully tested, are not premature given the lack of a complete
systems architecture, and produce a proven, verifiable business
value.  The act providing IRS' fiscal year 1997 appropriations\7 and
the related conference report limited IRS' information technology
spending to efforts consistent with these categories. 

In September 1997, we briefed IRS' appropriations and authorizing
committees on the results of our assessment of IRS' modernization
blueprint.  In those briefings and in a subsequent report,\8 we
concluded that the blueprint represented a good start but was not
sufficiently complete to use as the basis for building or acquiring
systems.  As a result, the conference report accompanying IRS' fiscal
year 1998 appropriations act\9 limited IRS' 1998 spending to efforts
that were consistent with the aforementioned spending categories. 

IRS' fiscal year 1999 request of $1.54 billion for the Information
Systems appropriation appears consistent with the spending/funding
conditions discussed previously.  For example, over 90 percent of the
request is for such things as (1) ongoing systems operations and
maintenance (e.g., Year 2000 conversion efforts, service center
mainframe consolidation, and implementation of recent tax law
changes); (2) institutionalization of systems life cycle rigor and
discipline; (3) establishment of an organization to manage the
modernization contractor; and (4) establishment of an organization to
independently ensure system quality.  The remainder ($125 million) is
for new systems that are either generally small, low risk, near-term
projects (e.g., $33.3 million for replacement of 7-year-old laptop
computers used by revenue agents) or projects that involve deployment
of already developed systems, such as $60.7 million for the
Integrated Collection System, for which IRS has analyzed the system's
actual performance at pilot locations to validate its expected cost
effectiveness. 


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

\7 P.L.  104-208, Sept.  30, 1996. 

\8 Tax Systems Modernization:  Blueprint Is a Good Start But Not Yet
Sufficiently Complete to Build or Acquire Systems
(GAO/AIMD/GGD-98-54, Feb.  24, 1998). 

\9 H.R.  Conf.  Rep.  No.  105-284 (1997). 


      IRS HAS NOT ADEQUATELY
      JUSTIFIED $246.5 MILLION OF
      THE "INFORMATION TECHNOLOGY
      INVESTMENTS ACCOUNT" REQUEST
------------------------------------------------ Chapter STATEMENT:2.2

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

In its fiscal year 1998 budget request for IRS, the administration
had proposed an "Information Technology Investments Account" and
requested $1 billion to fund it--$500 million in fiscal year 1998 and
$500 million in fiscal year 1999.  In our testimony last year before
this Subcommittee, we questioned the need for this funding because
the amounts requested were not based on analytical data or derived
using formal cost estimating techniques, as required by OMB.\10
Subsequently, in IRS' fiscal year 1998 appropriations act,\11
Congress provided only $325 million for the investments account and
made these funds available through fiscal year 2000.  Additionally,
Congress conditioned obligation of these funds on completion of the
modernization blueprint and prohibited IRS from obligating any of the
$325 million until September 1998. 

For fiscal year 1999, the administration is requesting $323 million
for the investments account.  When combined with the $325 million
already appropriated, this request would increase the account's total
to $648 million.  According to IRS, these funds are needed to develop
and deploy systems under phase 1/release 1 of its modernization
blueprint.  However, IRS' validated and approved business case
justification and associated documentation for phase 1/release 1
specify development costs (derived using a formal cost estimating
technique) of $401.5 million. 

IRS has not justified the remaining $246.5 million of this $648
million on the basis of analytical data or derived the $246.5 million
using a verifiable estimating method.  IRS' budget estimates indicate
that the $246.5 million will be used to develop business cases for
subreleases 1.3 and 1.5 of phase 1/release 1 and to develop plans for
releases 2 through 5 of phase 1.  IRS officials could not explain how
the additional $246.5 million was derived or what it was based on,
other than to state that the funds will be used to develop IRS'
systems life cycle methodology and future modernization business
cases.  Additionally, IRS budget documents state that $20 million of
this amount would be earmarked for development and integration of the
systems life cycle methodology.  However, this request for funding
lacks analytical support and is contradicted by other information. 
For example, the phase 1/release 1 business case used to justify the
$401.5 million in this account already covers all phase 1/release 1
subreleases.  Moreover, the "Information Systems" appropriation
request already includes $15 million for systems life cycle
development. 

For these reasons, we suggest that Congress consider reducing the
fiscal year 1999 request for the "Information Technology Investments
Account" by $246.5 million. 


--------------------
\10 Tax Administration:  IRS' Fiscal Year 1997 Spending, 1997 Filing
Season, and Fiscal Year 1998 Budget Request (GAO/T-GGD/AIMD-97-66,
Mar.  18, 1997). 

\11 P.L.  105-61, Oct.  10, 1997. 


   CONGRESS SHOULD CONSIDER
   PRECLUDING OBLIGATION OF
   INVESTMENT ACCOUNT FUNDS UNTIL
   SYSTEMS LIFE CYCLE IS COMPLETED
   AND IMPLEMENTED
-------------------------------------------------- Chapter STATEMENT:3

In our recent report on IRS' modernization blueprint, we recommended
that IRS limit future requests for information technology
appropriations to the four categories we mentioned earlier until IRS
has implemented mature systems life cycle processes for developing
and acquiring systems across the agency.\12 IRS has not yet
implemented such processes.  The fiscal year 1999 budget request
includes funding for accomplishing just this, which we strongly
support.  However, until this implementation is accomplished, we
suggest that Congress consider precluding IRS from obligating
"Information Technology Investments Account" funds for the purpose of
developing or acquiring systems under its modernization blueprint. 


--------------------
\12 GAO/AIMD/GGD-98-54. 


   CUSTOMER SERVICE INITIATIVE
   ADDRESSES MANY PROBLEM AREAS
-------------------------------------------------- Chapter STATEMENT:4

The fiscal year 1999 budget request includes a new initiative that,
if approved, will provide $103 million to enhance IRS' customer
service.  This initiative is the result of findings and
recommendations by a Customer Service Task Force formed in May 1997. 

Although the task force did not issue its report until March 1998,\13
its findings and recommendations were available to IRS several months
earlier.  In that regard, IRS' operating functions were told to
develop cost estimates for implementing numerous changes proposed by
the task force.  The original estimate of $212.5 million was
eventually reduced during the budget review and approval process to
the $103 million in the administration's budget request.  According
to IRS, some of the $109.5 million reduction represented more
accurate costing of parts of the proposed initiative, such as the
plan to provide better telephone services, while the rest of the
reduction was accommodated by either deleting parts of the proposed
initiative, such as plans to enhance the appeals process, or revising
the scope of other parts, such as plans to strengthen support for
small businesses (see app.  II). 

Under the revised proposal, the greatest shares of the $103 million
are to go toward providing better telephone service and improving
customer service training ($50.4 million and $22.5 million,
respectively).  Smaller amounts are to be used to, among other
things, strengthen the Taxpayer Advocate's Office; create citizen
advocacy panels; make it easier for taxpayers to get answers in
person; and improve the clarity of notices, forms, and publications. 
The need for improvement in many of these areas has been apparent for
some time, and certain of IRS' proposed actions (such as providing
better telephone service, creating citizen advocacy panels, and
strengthening the Taxpayer Advocate's Office) are attempts to address
some of the problems recently highlighted by Congress and the
Commission on Restructuring IRS.  Whether the $103 million is a
reasonable estimate of the funds needed in fiscal year 1999 to
implement this initiative will not be known until more details are
available on the various parts of the initiative.  Another unknown is
how, if at all, the revised organizational concept proposed by the
Commissioner earlier this year will affect IRS' plans for improving
customer service in fiscal year 1999 or beyond. 


--------------------
\13 Reinventing Service at the IRS, IRS Publication 2197 (March
1998). 


   VARIOUS FACTORS DIMINISH THE
   VALUE OF IRS' BUDGET ESTIMATES
   FOR OVERSIGHT PURPOSES
-------------------------------------------------- Chapter STATEMENT:5

Each year, IRS submits detailed budget estimates to support the
administration's budget request.  We have found recent years' budget
estimates to be more useful for oversight purposes, primarily because
of the inclusion of better performance measures and more narrative
information on actual and planned performance.  Nevertheless, the
utility of IRS' budget estimates for oversight purposes is limited
because (1) the intermingling of enforcement and assistance resources
within various budget activities precludes an assessment of the
balance between those two areas; (2) periodic restructuring of IRS'
appropriations and budget activities hinders long-term trend
analyses; and (3) the budget estimates provide inadequate information
on the resources being devoted to such critical areas as the Year
2000 effort and the Taxpayer Advocate's Office. 


      MIX BETWEEN ASSISTANCE AND
      ENFORCEMENT IS NOT CLEAR
------------------------------------------------ Chapter STATEMENT:5.1

Achieving IRS' strategic objectives of improving customer service and
increasing compliance requires a mix of assistance and enforcement. 
Finding the appropriate mix is not easy, and we do not claim to have
the answer.  However, we do think that it is important for effective
oversight that Congress know what mix IRS is achieving and what mix
it plans to achieve.  That information cannot be derived from IRS'
budget estimates. 

For example, IRS is requesting $891.6 million and 21,147 FTEs for the
"Telephone and Correspondence" budget activity within the Processing,
Assistance, and Management appropriation.  That activity covers all
non face-to-face contacts between IRS and taxpayers.  Such contacts
include typical forms of assistance, such as answering telephone
calls and correspondence, as well as several enforcement activities,
such as correspondence audits and attempts to collect overdue taxes
via the telephone. 

Last year, IRS was able to provide a breakdown of the FTEs included
in the fiscal year 1998 budget request for Telephone and
Correspondence.  As table 2 shows, 44 percent of those FTEs were for
enforcement-related operations. 



                                Table 2
                
                  Breakdown of Fiscal Year 1998 Budget
                     Request for the Telephone and
                     Correspondence Budget Activity

Component                             FTEs
--------------------------------  --  --------------------------------
Toll-free operations                  6,459
Adjustments/Taxpayer Relations        4,722
Problem Resolution Program            438
======================================================================
Subtotal--assistance-related          11,619 (56 percent of total)
 operations
Service Center Examination            3,473
Service Center Collection Branch      2,844
Automated Collection System           2,839
======================================================================
Subtotal--enforcement-related         9,156 (44 percent of total)
 operations
======================================================================
Total                                 20,775
----------------------------------------------------------------------
Source:  IRS response to a question from the Senate Appropriations
Committee in conjunction with hearings on IRS' fiscal year 1998
budget request. 

This year, because of a change in its accounting structure, IRS could
not give us a breakdown of the Telephone and Correspondence budget
activity for fiscal year 1999.  Thus, we do not know how much of this
request IRS expects to devote to assistance as opposed to
enforcement. 

Similarly, despite its name, the Tax Law Enforcement appropriation is
not exclusively for enforcement.  The $3.2 billion and 46,130 FTEs
being requested for that appropriation include an unspecified amount
of money and FTEs for various forms of assistance, including walk-in
service, taxpayer education efforts, and problem resolution.  The
$143 million and 2,184 FTEs being requested for the EIC compliance
initiative, which we discuss in more detail later, also involve a mix
of assistance and enforcement, but, again, that mix is not apparent
in IRS' budget estimates. 


      BUDGET RESTRUCTURING HINDERS
      TREND ANALYSES
------------------------------------------------ Chapter STATEMENT:5.2

It is often useful, in assessing agency operations, to analyze trends
over several years.  IRS' annual budget estimates are not conducive
to such analyses because IRS periodically restructures its
appropriations and the budget activities within those appropriations. 

The most recent restructuring, done in conjunction with the
administration's budget request for fiscal year 1998, involved the
merging of various budget activities and the movement of activities
between appropriations.  According to IRS, that restructuring was
done to, (1) match the way IRS manages its programs, (2) facilitate a
clean opinion on its financial statements by simplifying account
reconciliation and providing an easier audit trail, (3) distinguish
capital investments from operations, and (4) provide maximum resource
flexibility.  Another restructuring seems likely if and when the
Commissioner's proposed reorganization becomes reality. 

We are not taking issue with the changes IRS made for fiscal year
1998 or with the need to restructure in general.  Our intent is to
point out how restructuring can hinder the ability to conduct
long-term trend analyses.  For example, IRS established a new budget
activity in fiscal year 1998 called Telephone and Correspondence,
which was formed by merging pieces from the Taxpayer Services budget
activity, which was discontinued, and the Examination and Collection
budget activities, which were retained in reconfigured forms.  When
IRS restructured its budget activities for fiscal year 1998, it
recalculated its fiscal year 1997 accounts to be compatible with the
new structure.  However, years before 1997 are not compatible with
the new structure, making long-term analyses difficult.  For example,
it would be of little value to compare IRS' request for the
Examination budget activity in fiscal year 1999 with the actual
figures for that activity in fiscal year 1996 because the 1999
version of that activity includes certain programs (such as Taxpayer
Education) that were not part of the 1996 version and excludes
programs (such as Service Center Correspondence) that were part of
the 1996 version. 

Even with restructuring, long-term analysis could still be possible
if there was adequate detail behind the various budget activities. 
However, some key details are no longer available.  As discussed
earlier, IRS no longer has the level of detail behind the Telephone
and Correspondence activity that it had when it first restructured
that budget activity in 1998. 


      BUDGET ESTIMATES PROVIDE
      INADEQUATE INFORMATION ON
      THE RESOURCES DEVOTED TO
      CERTAIN CRITICAL AREAS
------------------------------------------------ Chapter STATEMENT:5.3

Two IRS activities that are of considerable interest to Congress in
the current environment are the Year 2000 effort and IRS' efforts to
identify and resolve taxpayer problems.  IRS' budget estimates for
fiscal year 1999 provide inadequate information on both of those
activities. 


         YEAR 2000 EFFORT
---------------------------------------------- Chapter STATEMENT:5.3.1

As discussed earlier, IRS' Year 2000 effort involves significant
resources to convert existing systems, consolidate mainframes, and
replace the primary tax and remittance input processing systems. 
Also, as discussed earlier, IRS has identified additional funding
needs for fiscal year 1998 that go well beyond the amount
appropriated.  Despite the significance of this effort, IRS' fiscal
year 1999 budget estimates do not discuss IRS' revised funding needs
for fiscal year 1998 or specify how much of the $1.5 billion being
requested for information systems in fiscal year 1999 is for Year
2000 activities. 


         PROBLEM RESOLUTION
---------------------------------------------- Chapter STATEMENT:5.3.2

During the past year, Congress questioned the independence of IRS'
Taxpayer Advocate and the adequacy of resources devoted to the
resolution of taxpayers' problems through the Problem Resolution
Program (PRP).  IRS' budget estimates do not accurately reflect the
level of resources being devoted to problem resolution.  In addition,
concerns about independence may be exacerbated by the way IRS funds
the work of the Taxpayer Advocate's Office. 

According to IRS, the fiscal year 1999 budget request includes about
$38 million and 628 FTEs for the Taxpayer Advocate's Office, an
increase of about $14 million and 191 FTEs over the proposed
operating level in fiscal year 1998.\14 Those resources are not
separately identified in IRS' budget estimates but are included
within the Telephone and Correspondence budget activity.  Even if
those resources were separately identified, they would significantly
understate the level of resources IRS has been allocating and plans
to allocate to activities of the Taxpayer Advocate's Office.  That is
because many of the staff who work PRP cases and who participate in
Problem Solving Days are funded by other functions, such as
Examination and Collection.  In that regard, according to a January
1998 report by the Taxpayer Advocate, his resources for fiscal year
1998 are being supplemented by more than 1,000 other field employees,
on either a full or part-time basis.  We believe that oversight of
the operations of the Taxpayer Advocate's Office would be enhanced if
(1) the Office were given more visibility in IRS' budget structure
and (2) IRS' budget estimates provided complete information on the
amount of resources being devoted to those operations. 

A more fundamental question, however, is whether the Taxpayer
Advocate's independence is compromised in any way by the need to rely
on other functions for needed staff.  While working PRP cases, these
employees receive program direction and guidance from the Taxpayer
Advocate's Office but are administratively responsible to their
functional organizations--oftentimes the same organizations
responsible for the problems that led taxpayers to seek the
Advocate's help.  We are pursuing this and other issues in an ongoing
study of the Taxpayer Advocate's Office for this Subcommittee. 


--------------------
\14 Among other things, the increase in resources for the Taxpayer
Advocate's Office is intended to help that office handle a growing
workload generated, at least in part, by the Problem Solving Days IRS
has been holding monthly across the country. 


   IRS FACES MANY CHALLENGES IN
   DEVELOPING USEFUL PERFORMANCE
   MEASURES
-------------------------------------------------- Chapter STATEMENT:6

As mentioned earlier, one aspect of IRS' budget estimates that has
improved over the years involves the use of performance measures. 
The performance measures shown in IRS' budget have become more useful
as IRS strives to develop and implement a results-oriented
performance measurement system that will meet the requirements of the
Results Act.  As IRS acknowledges, there is still much work to be
done in that area. 

IRS' budget estimates for fiscal year 1999 include numerous
performance measures, some of which have yet to be developed.  The
budget estimates include a brief description of each measure and, for
those that have been developed, provide such information as the
source and reliability of data used to compile the measure.  Tracking
performance measures over time is not always possible because some
are added or dropped each year and others are revised.  These kinds
of changes are to be expected as IRS gets input from Congress and
other stakeholders and learns more about how to measure its
performance.  In its fiscal year 1999 budget estimates, for example,
IRS lists 16 discontinued performance measures, some of which were
dropped in response to congressional concern about an undue emphasis
on enforcement results. 

IRS has a three-tiered system of performance measures.  At the
highest (mission) level, IRS has a mission effectiveness indicator
intended to measure the agency's overall performance in collecting
the proper amount of tax revenue at the least cost or burden to the
government and the taxpayer.  The second (strategic) level of
indicators is intended to gauge IRS' progress in meeting its
strategic objectives to improve customer service, increase taxpayer
compliance, and increase productivity.  According to IRS' fiscal year
1999 budget estimates, for example, IRS has four indicators and plans
to develop two others to gauge its progress in improving customer
service.  The four existing indicators are (1) taxpayer burden cost
for IRS to collect $100, (2) initial contact resolution rate for
taxpayer inquiries, (3) toll-free telephone level of access, and (4)
tax law accuracy rate for taxpayer inquiries.  The two indicators IRS
plans to develop are (1) customer satisfaction rates and (2) employee
satisfaction rate.  The third (program) level of indicators is
intended to measure the accomplishments of specific IRS programs or
operations.  For example, IRS' fiscal year 1999 budget estimates
include 18 program-level customer service measures, covering such
things as refund timeliness, number of telephone calls answered, the
quality of PRP cases, and the number of walk-in service contacts. 
(See app.  III for a list of all of the performance measures in IRS'
fiscal year 1999 budget estimates and a comparison of those measures
for fiscal years 1997, 1998, and 1999.)

IRS faces some difficult challenges as it strives to improve its
performance measurement system.  We discussed some of those
challenges in a recent report to the Subcommittee on measuring
customer service.\15 As noted in that report, key challenges facing
IRS include (1) developing a reliable measure of taxpayer burden,
including the portion that IRS can influence; (2) developing measures
that can be used to compare the effectiveness of the various customer
service programs; and (3) refining or developing new measures that
gauge the quality of the services provided.  Measuring burden is
especially difficult.  IRS currently measures burden by using a model
that estimates the time taxpayers spend on each tax form.  As such,
the measure excludes the burden taxpayers face after they file their
tax returns, such as the time and costs incurred in responding to IRS
notices and audits.  Flaws in the burden measure also limit the
usefulness of IRS' mission effectiveness indicator, because burden is
a key component of that indicator.  IRS recognizes the limitations of
its burden measure and is looking for alternatives. 

Devising ways to measure the burden that IRS influences and
overcoming the other challenges our report identified will not be
easy.  IRS is faced with devising reliable measures that are useful
in improving agency and program performance, improving
accountability, and supporting policy decisionmaking.  At the same
time, IRS is faced with making decisions on how to minimize the costs
of collecting data and measuring results over time. 


--------------------
\15 Tax Administration:  IRS Faces Challenges in Measuring Customer
Service (GAO/GGD-98-59, Feb.  23, 1998). 


   INTERIM DATA ON THE 1998 FILING
   SEASON SHOW CONTINUED
   IMPROVEMENT IN TWO IMPORTANT
   AREAS
-------------------------------------------------- Chapter STATEMENT:7

Despite some problems (e.g., envelopes that were printed with
incorrect bar codes and an apparent programming error that caused
some incorrect notices), IRS appears to be headed toward another
generally successful filing season.  Two areas that we have looked at
in assessing recent filing seasons for the Subcommittee are the
extent to which returns are being filed electronically and the
ability of taxpayers to reach IRS by telephone.  In a report to the
Subcommittee on the 1997 filing season, we said that IRS had made
substantial improvements in both of those areas.\16 Data from the
first 2 1/2 months of the 1998 filing season indicate continuing
improvement.  Besides electronic filing and telephone accessibility,
another area of IRS emphasis this filing season is EIC noncompliance. 
This is the first year of a planned 5-year initiative aimed at
reducing noncompliance through assistance, enforcement, and research. 
Although it is too early to assess the results of this year's
efforts, we do have some preliminary observations on two parts of the
initiative. 


--------------------
\16 Tax Administration:  IRS' 1997 Tax Filing Season (GAO/GGD-98-33,
Dec.  29, 1997). 


      USE OF ELECTRONIC FILING
      CONTINUES TO INCREASE
------------------------------------------------ Chapter STATEMENT:7.1

As shown in table 3, as of March 13, 1998, IRS had received 23.4
percent more electronic returns than at the same time last year. 
This increase is even more significant considering that the total
number of individual income tax returns filed as of March 13, 1998,
was up less than 1 percent from the same time last year. 



                                Table 3
                
                 Individual Income Tax Returns Received

                        1/1/    1/1/                 1/1/
                       96 to   97 to      Percent   98 to      Percent
                       3/15/   3/14/  change 1996   3/13/  change 1997
Type of filing            96      97      to 1997      98      to 1998
--------------------  ------  ------  -----------  ------  -----------
Traditional           36,258  32,250       -11.1%  29,528        -8.4%
 paper
1040PC\a               2,767   3,195         15.5   2,408        -24.6
======================================================================
Total paper           39,025  35,445         -9.2  31,936         -9.9
Traditional            9,811  11,570         17.9  14,199         22.7
 electronic\b
TeleFile\c             2,379   3,663         54.0   4,597         25.5
======================================================================
Total electronic      12,190  15,233         25.0  18,796         23.4
======================================================================
Total                 51,215  50,678        -1.1%  50,732         0.1%
----------------------------------------------------------------------
\a Under the Form 1040PC method of filing, a taxpayer or tax return
preparer uses personal computer software that produces a paper tax
return in an answer-sheet format.  The Form 1040PC shows the tax
return line number and the data for that line number.  Only numbers
for those 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. 

\c Under TeleFile, certain taxpayers who are eligible to file a Form
1040EZ are allowed to file using a toll-free number on touch-tone
telephones. 

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

As table 3 shows, the largest percentage increase last year and again
this year is in the number of returns filed through TeleFile.  The
increase for 1997 was largely attributed to IRS' decision not to
include a Form 1040EZ in the tax package sent to taxpayers who
appeared to be eligible to use TeleFile--thus encouraging them to use
TeleFile.  The increase in use of TeleFile for 1998 may be due to a
combination of last year's tax package change and a change in IRS'
procedures this year.  Until this year, persons who had a different
address from the one they used on their prior year's return were
ineligible to use TeleFile.  For 1998, however, IRS updated the
address information in its records through use of the Postal
Service's National Change of Address File and is now able to accept
TeleFile returns from some persons who moved after they filed last
year.  According to IRS, this new procedure allowed it to mail
TeleFile tax packages to about 1.6 million potentially eligible
TeleFilers who would not have been given the opportunity to file via
TeleFile under the old procedure. 

The use of traditional electronic filing had also increased as of
March 13--by about 23 percent over the same period last year.  There
have been a few changes in the program this year that may have
contributed to this increase.  For example, two more states (Alabama
and Arizona) joined the Fed/State electronic filing program, and IRS
added two more forms to the list of forms that can be filed
electronically.  We have insufficient information at this time to
determine how much of the increase might be due to those changes
rather than to a general growth in the willingness of taxpayers and
tax return preparers to use this alternative way of filing. 


      TELEPHONE ACCESSIBILITY
      CONTINUES TO IMPROVE
------------------------------------------------ Chapter STATEMENT:7.2

Another continuing positive trend this filing season is an increase
in the ability of taxpayers who need assistance to reach IRS by
telephone.  In our report on the 1997 filing season, we noted that
the accessibility of IRS' telephone assistance had increased from 20
percent during the 1996 filing season to 51 percent during the 1997
filing season.  As shown in table 4, IRS data for the first 2 1/2
months of the 1998 filing season indicate that the level of access to
IRS' toll-free telephone assistance has continued to increase.  One
clear indicator of that increased access is the significant drop in
the number of calls receiving busy signals. 



                                Table 4
                
                 Toll-Free Telephone Level of Access\a
                 for the First 2 1/2 Months of the 1998
                       and 1997 Filing Seasons\b

                                                    1998\c        1997
----------------------------------------------  ----------  ----------
(a) Calls answered                                    23.2        23.2
(b) Calls abandoned                                    4.9         5.0
======================================================================
(c) Subtotal -Calls that got into IRS' system         28.1        28.2
(d) Busy signals                                       2.9        13.5
======================================================================
(e) Total call attempts                               31.0        41.7
Percent Level of Access\d                              91%         68%
Percent of calls that got into IRS' system but         17%         18%
 were abandoned\e
----------------------------------------------------------------------
Note:  Numbers are in millions. 

\a We recently reached agreement with IRS on measuring accessibility
to IRS' toll-free telephone system.  The measure, called Toll-Free
Telephone Level of Access, reflects the combined level of access for
six toll-free numbers that taxpayers can call to, among other things,
get answers to tax law questions or get information on their account. 
Level of Access is computed by dividing the number of calls received
by total call attempts.  A call is considered received if it reaches
IRS' automated call system, whether it is answered by IRS or
abandoned by the caller.  (In 1998, 17 percent of the calls received
were abandoned by the caller before making contact with an assistor.)
Total call attempts are all calls received plus any calls that got a
busy signal.  We calculated the information for both years in table 4
using this methodology except as noted in note "c" below. 

\b Data are for January 1 through March 14, 1998, and January 1
through March 15, 1997. 

\c Although IRS' methodology combines data for six toll-free numbers,
we backed out data for one of the numbers (the one for the Automated
Collection System) in calculating the results for 1998 because IRS
did not include data for that number in computing its results for
1997.  With that deletion, data for 1997 and 1998 in table 4 should
be comparable. 

\d Computed by dividing subtotal (c) by total (e). 

\e Computed by dividing calls abandoned (b) by subtotal (c). 

Source:  IRS' Weekly Customer Service Report. 

IRS took some steps this year to improve accessibility.  For example,
it (1) increased the hours assistors are available to answer
telephone calls from 10 hours a day, 5 days a week in 1997, to 16
hours a day, 6 days a week in 1998, and (2) increased the number of
complex tax topics that are to be handled through a voice messaging
system.\17 However, despite these changes, the data in table 4
indicate that the number of calls answered by IRS has remained
constant compared to the number for 1997 and that the increase in
level of access is due to a decrease in call attempts. 


--------------------
\17 Taxpayers calling with questions about these topics are asked to
leave their name, telephone number, address, and best time for IRS to
call them back.  Staff detailed from IRS' Examination function are to
call the taxpayers back within 3 business days. 


         OUR TEST CONFIRMS
         IMPROVED ACCESSIBILITY
---------------------------------------------- Chapter STATEMENT:7.2.1

To independently check whether the level of access to IRS' toll-free
assistance had increased, we conducted a test from February 9 through
26, 1998.  Our results, which are not projectable, showed that the
level of access we achieved during our test was close to the
91-percent level of access reported by IRS for the first 2 1/2 months
of this filing season.  We made 384 total calls to IRS and gained
access to the telephone system 333 times, a level of access of 86.7
percent.  On the other 51 calls, we received busy signals. 

Of the 333 times we gained access to the telephone system, we were
routed to lines that were to be answered by IRS' assistors 263 times
and to lines that were to be answered by a voice messaging system 70
times.  Of the 263 times we were routed to an assistor, we made
contact with an assistor 239 times (90.9 percent).  We abandoned the
other 24 calls (9.1 percent) without making contact with an assistor
after remaining on hold for 7 minutes.  For each of the 70 calls that
were routed to the voice messaging system, we left a message.  In 57
of those cases, (81.4 percent), we received a call back from IRS
within 3 business days. 


      SOME PRELIMINARY
      OBSERVATIONS ON THE EIC
      COMPLIANCE INITIATIVE
------------------------------------------------ Chapter STATEMENT:7.3

IRS' fiscal year 1998 appropriation included $138 million for the
first year of what is to be a 5-year EIC compliance initiative.  IRS'
budget request for fiscal year 1999 includes $143 million for the
second year of that initiative.  IRS has developed a plan for using
these appropriated funds that calls for various efforts directed at
reducing EIC noncompliance, including expanded assistance, increased
enforcement, and enhanced research. 

We are gathering data on IRS' efforts as part of two reviews for the
Subcommittee:  a review of EIC noncompliance and a review of the 1998
filing season.  We are unable to comment at this time on the impact
of any efforts undertaken this filing season because not enough time
has elapsed for us to assess results. 

However, we do have some comments on two aspects of IRS' plans for
this filing season.  First, some of the expanded assistance IRS has
planned will probably be too late to help many EIC claimants.  In
particular, IRS designated March 28 as EIC Awareness Day, and
designated April 4 and April 11 as Problem Prevention Days.  On those
days, IRS staff are to be available at over 150 walk-in sites to help
EIC claimants prepare their returns.  Although that kind of
assistance is commendable, it will come too late to help many EIC
claimants, if last year's filing trends hold constant.  Of about 19.5
million returns filed last year with EIC claims, about 11.9 million
(61 percent) were received by IRS before the end of March. 

We also have questions about IRS' baseline measure of EIC compliance. 
IRS did a study in 1995 involving a sample of taxpayers who claimed
an EIC on their tax year 1994 returns.  The study showed that EIC
claimants were not entitled to about 26 percent of the EIC dollars
they were claiming--a noncompliance rate that generated considerable
congressional concern, eventually leading to the EIC compliance
initiative.  However, in response to our questions about the current
EIC initiative, IRS officials told us that the results of the 1995
study could not be used as a baseline measure of EIC compliance,
although they were unable to satisfactorily explain why.  IRS'
assertion that the 1995 study cannot be used as a baseline measure of
compliance raises the question whether decisions to develop and fund
the 5-year EIC initiative were founded on reliable compliance data. 

If IRS does a new baseline study, we question whether the results
will be available soon enough to be of any value to Congress.  Our
concern stems from IRS' history in conducting past EIC compliance
studies.  For example, IRS did not release the results of its 1995
study until April 1997.  If data from a new baseline study are not
available until 2000, IRS will already be in the third year of the
initiative and will have finalized its funding request for the fourth
year. 


------------------------------------------------ Chapter STATEMENT:7.4

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


IRS' FISCAL YEAR 1999 BUDGET
REQUEST COMPARED WITH PROPOSED
FISCAL YEAR 1998 OPERATING LEVEL
=========================================================== Appendix I

                              (Dollars in thousands)

                       Fiscal year 1998    Fiscal year 1999     Percent change
                      ------------------  ------------------  ------------------
Budget activity        Dollars      FTEs   Dollars      FTEs   Dollars      FTEs
--------------------  --------  --------  --------  --------  --------  --------
Submission            $850,787    15,105  $888,408    15,113     4.42%     0.05%
 Processing
Telephone &            827,176    20,255   891,648    21,147      7.79      4.40
 Correspondence
Document Matching       61,110     1,682    62,629     1,682      2.49      0.00
Inspection             100,963     1,168   106,518     1,179      5.50      0.94
Management Services    511,046     6,850   556,005     6,950      8.80      1.46
Rent & Utilities       574,792       135   657,222       135     14.34      0.00
================================================================================
Subtotal:             2,925,87    45,195  3,162,43    46,206      8.08      2.24
 Processing,                 4                   0
 Assistance, and
 Management
 Appropriation
Criminal               367,867     4,103   373,407     4,103      1.51      0.00
 Investigation
Examination           1,726,13    24,934  1,714,52    24,934     -0.67      0.00
                             2                   0
Collection             667,356    11,938   692,847    11,995      3.82      0.48
Employee Plans and     134,315     2,045   133,520     2,045     -0.59      0.00
 Exempt
 Organizations
Statistics of Income    25,787       471    26,766       471      3.80      0.00
Chief Counsel          222,011     2,582   228,479     2,582      2.91      0.00
================================================================================
Subtotal: Tax Law     3,143,46    46,073  3,169,53    46,130      0.83      0.12
 Enforcement                 8                   9
 Appropriation
Operational           1,272,48     7,329  1,415,88     7,284     11.27     -0.61
 Information Systems         7                   4
Developmental                0         0   125,000       209        NA        NA
 Information Systems
================================================================================
Subtotal:Information  1,272,48     7,329  1,540,88     7,493     21.09      2.24
 Systems                     7                   4
 Appropriation
================================================================================
Information            325,000         0   323,000         0     -0.62        NA
 Technology
 Investments
================================================================================
Earned Income Credit   138,000     1,954   143,000     2,184      3.62     11.77
 (outside caps)
================================================================================
Total                 7,804,82   100,551  8,338,85   102,013      6.84      1.45
                             9                   3
--------------------------------------------------------------------------------
Source:  IRS' February 2, 1998, budget estimates for fiscal year
1999. 


IMPACT OF REDUCTION IN CUSTOMER
SERVICE INITIATIVE FROM $212.5
MILLION TO $103 MILLION
========================================================== Appendix II

                         (Dollars in millions)

                 Original   Revised  Impact of reduction according to
Initiative       estimate   request  IRS
---------------  --------  --------  ---------------------------------
Improve clarity     $27.7      $5.0  Original plans called for
 of notices,                          rewriting all tax packages to
 forms and                            make them more customer friendly
 publications                         and easier to read; also called
                                      for publications for "lifetime
                                      events," such as adoptions.

                                      Revised plans call for phasing
                                      in the rewriting of tax
                                      packages; IRS intends to focus
                                      in FY 1999 on selected
                                      publications for lifetime
                                      events.
Provide better       65.2      50.4  Reductions reflect a more
 telephone                            accurate recosting.
 services
                                      All original plans can be
                                      achieved with the $50.4 million,
                                      including increasing service to
                                      24 hours, increasing access
                                      rates to 86%, expanding
                                      customized services through
                                      Voice Response Units, and
                                      expanding hours of forms
                                      distribution centers.
Make it easier       23.0       5.6  Original plans called for
 to get answers                       providing funds to conduct
 in person                            problem solving days, expand
                                      office hours, and open more
                                      convenient locations.

                                      Revised plans fully fund problem
                                      solving days. However, there
                                      will need to be some scaling
                                      back on plans to expand office
                                      hours, and IRS will not be able
                                      to open additional locations.
Expand                6.0       2.5  Reductions reflect a more
 electronic                           accurate recosting.
 filing
                                      IRS will aggressively pursue
                                      efforts to expand TeleFile and
                                      enable paperless filing through
                                      electronic signature
                                      alternative.
Strengthen            7.0       1.0  Original plans were staff
 customized                           intensive and provided 83 FTEs
 support for                          for both taxpayer outreach and
 small                                telephone assistance.
 business
                                      Revised plans eliminate
                                      additional FTEs for the taxpayer
                                      outreach programs and handle
                                      telephone assistance more
                                      efficiently.
Upgrade              $1.7        $0  The costs for Electronic Federal
 technology to                        Tax Payment System, if needed,
 improve                              will be absorbed within the
 customer                             total resource levels for
 service                              information systems.


Shift how             2.1       1.0  Reductions reflect a more
 performance is                       accurate recosting.
 measured
                                      Funding is sufficient for a
                                      contract to measure customer
                                      satisfaction.
Improve              32.0      22.5  These resources fund cross
 customer                             training of employees so that
 service                              the peak workload periods for
 training                             account and assistance work can
                                      be more efficiently handled.

                                      Reduction reflects a scaled back
                                      version of the original plan and
                                      more accurate costing.
Strengthen           21.0      10.0  Reduction will necessitate
 Taxpayer                             scaling back plans to provide
 Advocate's                           greater assistance through the
 Office                               Advocate's office. However, this
                                      level of funding increases
                                      current staffing levels by about
                                      one third.

                                      Because of the priority of this
                                      program, there may be some need
                                      to divert resources from other
                                      programs if enhanced service
                                      levels cannot be achieved with
                                      these resources.
Create citizen       15.0       5.0  Original plans called for
 advocacy                             providing funds for panels in
 panels                               all 33 districts.

                                      Revised plans fund pilots in
                                      four test sites, one for each
                                      region.
Enhance appeals      11.8         0  Original plans called for
 process                              establishing customer service
                                      representatives for the Appeals
                                      function in each district and
                                      speeding case processing to
                                      enhance customer service and
                                      reduce taxpayer burden.

                                      Because of other funding
                                      priorities, this initiative was
                                      eliminated.
----------------------------------------------------------------------
Source:  IRS' Office of Budget Formulation. 


IRS PERFORMANCE MEASURES
========================================================= Appendix III

Tables III.1 and III.2 show the mission, strategic, and program-level
performance measures included in IRS' February 2, 1998, budget
estimates for fiscal year 1999.  The strategic and program-level
measures are categorized by IRS' three strategic objectives of
improving customer service, increasing compliance, and increasing
productivity. 



                              Table III.1
                
                    IRS' Mission and Strategic-Level
                          Performance Measures

                                          1997        1998        1999
Performance Measure                     actual    estimate    estimate
----------------------------------  ----------  ----------  ----------
Mission-level measure
Mission Effectiveness Indicator          79.5%       79.5%       79.5%
 (percent)
Strategic-level measures
Improve customer service
Taxpayer burden cost (in dollars)        $8.52       $8.53       $8.55
 for IRS to collect $100
Initial contact resolution rate          78.8%         73%         73%
 (percent)\a
Toll-free telephone level of             65.1%         70%         86%
 access (percent)
Tax law accuracy rate for taxpayer       96.1%         96%         96%
 inquiries (online) (percent)
Customer satisfaction rates: all            NA          NA         TBD
 business lines
Employee satisfaction rate                  NA          NA         TBD
Increase compliance
Total collection percentage              87.3%       87.4%       87.4%
Total net revenue collected             $1.504      $1.575      $1.642
 (trillions of dollars)
Increase productivity
Budget cost to collect $100              $0.48       $0.47       $0.49
Customers successfully served per           NA          NA         TBD
 dollars expended
----------------------------------------------------------------------
Legend:  NA = not available; TBD = to be determined. 

\a For 1998 and 1999, this measure includes telephone contacts only;
correspondence contacts were included for 1997. 

Source:  IRS' February 2, 1998, budget estimates for fiscal year
1999. 



                              Table III.2
                
                IRS' Program-Level Performance Measures

                                          1997        1998        1999
Performance measure                     actual    estimate    estimate
----------------------------------  ----------  ----------  ----------
Improve customer service
Refund timeliness--paper filing             38          40          40
 (days)
Refund timeliness--electronic             14.5          21          21
 filing (days)
Processing accuracy-paper filing         95.2%         95%         95%
 (percent)
Processing accuracy--electronic          99.3%         99%         99%
 filing (percent)
Notice accuracy (percent)                98.6%       98.5%       98.5%
Number of TeleFile returns                 4.7         5.5         5.9
 (millions)
Taxpayers gaining access as a               NA          NA         TBD
 percent of demand
Customer complaint analysis                 NA          NA         TBD
Number of calls answered--               103.9       120.6       126.6
 includes automated (millions)
Correspondence answered                     NA          NA         TBD
Problem Resolution Program average
 processing time (days)
District office                           36.1        35.4        35.4
Service center                            31.6        30.3        30.3
Problem Resolution Program quality
 customer service rate (percent)
District office                          88.8%       89.4%       90.5%
Service center                           80.7%       81.6%       83.4%
Currency of Problem Resolution
 Program inventory (days)
District office                             94          87          87
Service center                              96          86          86
Walk-in customer service contacts-          NA         9.9         9.9
 -includes requests for forms
 (millions)
Technical advice and service                64          64          64
 assistance per FTE
Private letter rulings and advance          66          66          66
 pricing agreements per FTE
Regulations, revenue rulings and             9           9           9
 procedures, and legislation per
 FTE
Weekend Taxpayer Information File        89.6%       85.6%       85.6%
 update completion time (percent
 of timely updates of taxpayers'
 accounts)
Increase compliance
Service center examination dollars      $2.635      $2.141      $2.223
 recommended (billions)\a
Automated Collection System               $4.1        $4.1        $4.1
 dollars collected (billions)
Document matching dollars assessed        $1.5      $1.218      $1.218
 (billions)\a
Internal Audit corrective actions        76.7%       66.3%       69.5%
 completed (percent)
Internal Security investigations         62.9%       58.3%       61.1%
 effectiveness (percent)
Background investigations                76.3%       81.0%       82.6%
 completed timely (percent)
Inspection efficiency (products           8.91        8.33        8.50
 divided by FTEs realized)
Usefulness of Inspection products           NA        3.06        3.12
 to customers\b
Narcotics conviction rate                  90%         88%         88%
 (percent)
Fraud conviction rate (percent)            94%         90%         90%
Field examination dollars               $26.18      $26.10      $26.40
 recommended (billions)\a
Alternative treatment revenue               NA          NA         TBD
Appeals nondocketed cycle time             223         217         221
 (days)
Collection dollars (in billions)         $5.99       $6.04       $6.33
 collected--includes Collection
 Field, Special Procedures, and
 Collection Support functions
Collection average cycles per             34.1        34.7        34.7
 taxpayer delinquent account or
 taxpayer delinquency
 investigation disposition (weeks)
Employee plans determination               132         140         140
 letter cycle time (days)
Exempt organizations determination          84          87          87
 letter cycle time (days)
Employee plans examination cycle            NA         210         210
 time (days)
Exempt organizations cycle time             NA         314         314
 (days)
Docketed Tax Court closures per             65          65          65
 FTE
Bankruptcy closures per FTE                228         228         228
Litigation support completions per          87          87          87
 FTE
Corporate Files On-Line                  99.3%       99.0%       99.0%
 availability to front line
 personnel (percent)
EIC overclaim rate                          NA          NA         TBD
Increase productivity
Individual returns filed                 15.9%         17%       19.5%
 electronically (percent)
Dollars received electronically          40.6%       48.4%       78.2%
 (percent)
Percent of dollars received via          70.9%       70.9%       70.9%
 3rd party processors (lockbox)
Dollars collected per $100 dollars          NA          NA         TBD
 expended
Service center examination dollars          NA          NA         TBD
 recommended per $100 of cost\a
Average dollars collected through           NA          NA         TBD
 Automated Collection System per
 $100 of cost
Support services performance index         100         103       104.5
Space utilization rate (square             213         196         180
 feet)
Field examination dollars                   NA          NA         TBD
 recommended per $100 of cost\a
Alternative treatment revenue per           NA          NA         TBD
 $100 of cost
Appeals staff days per disposal           2.04        2.03        2.00
Collection dollars collected per            NA          NA         TBD
 $100 of cost
Statistics of Income projects               NA         90%         90%
 delivered on time (percent)
Statistics of Income quality                NA         90%         90%
 customer service rate (percent)
Integrated Data Retrieval System           99%         99%         99%
 real time availability (percent)
----------------------------------------------------------------------
Legend:  NA = not available; TBD = to be determined. 

\a IRS plans to adjust these amounts to remove the portion
attributable to penalties. 

\b According to IRS, this measure is computed by dividing the
weighted sum of all customer responses to questions on the usefulness
of Inspection products by the number of customer responses to
Inspection requests for feedback on usefulness. 

Source:  IRS' February 2, 1998, budget estimates for fiscal year
1999. 


*** End of document. ***