Tax Administration: IRS' Fiscal Year 2000 Budget Request and 1999 Tax
Filing Season (Testimony, 04/13/1999, GAO/T-GGD/AIMD-99-140).
This testimony discusses the administration's fiscal year 2000 budget
request for the Internal Revenue Service (IRS) and the status of the
1999 tax filing season. For next year, the administration is requesting
$8.2 billion and nearly 98,000 full-time equivalent positions for
IRS--about the same as for fiscal year 1999. Even so, there are
differences in how IRS plans to spend its fiscal year 2000 funds. For
example, the request includes about $197 million for three critical
initiatives--organizational modernization, implementation of the IRS
Restructuring and Reform Act of 1998, and customer service training.
IRS' current five-year cost estimate to make its information systems
Year 2000 compliant is $1.3 billion--$345 million higher than its
estimate a year ago. IRS is requesting $1.46 billion for information
systems in fiscal year 2000. IRS' plans for spending those funds are
consistent with earlier GAO recommendations and congressional direction.
For fiscal year 2001, IRS is also asking for an advance appropriation of
$325 million for its multi-year capital account for systems
modernization. The agency has not adequately justified that request in
accordance with federal information technology investment requirements.
With respect to the 1999 filing season, GAO found that the accessibility
and quality of IRS' telephone service has deteriorated considerably
since last year; the number of individual income tax returns filed
electronically continues to rise, although fewer returns are being filed
by telephone; many taxpayers have made mistakes with the new child tax
credit; and many systems for processing returns and remittances have
been doing a good job.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-GGD/AIMD-99-140
TITLE: Tax Administration: IRS' Fiscal Year 2000 Budget Request
and 1999 Tax Filing Season
DATE: 04/13/1999
SUBJECT: Federal agency reorganization
Presidential budgets
Tax administration systems
Systems conversions
Future budget projections
Performance measures
Strategic information systems planning
Electronic forms
Customer service
Tax returns
IDENTIFIER: IRS Taxpayer Compliance Measurement Program
Y2K
EIC
Earned Income Tax Credit
IRS Integrated Submission and Remittance Processing System
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United States General Accounting Office GAO
Testimony Before the Subcommittee on Oversight House Committee on
Ways and Means For Release on Delivery Expected at
TAX ADMINISTRATION 1:00 p.m. EDT Tuesday April 13, 1999
IRS' Fiscal Year 2000 Budget Request and 1999 Tax Filing Season
Statement of James R. White, Director Tax Policy and
Administration Issues General Government Division GAO/T-GGD/AIMD-
99-140 Statement Tax Administration: IRS' Fiscal Year 2000 Budget
Request and 1999 Tax Filing Season Mr. Chairman and Members of the
Subcommittee: We are pleased to participate in the Subcommittee's
inquiry into the administration's fiscal year 2000 budget request
for the Internal Revenue Service (IRS) and the status of the 1999
tax filing season. Our statement is based on (1) our review of the
administration's fiscal year 2000 budget request for IRS and
supporting documentation; (2) interim results of our review of the
1999 tax filing season; (3) our ongoing review of IRS'
restructuring efforts; and (4) our past and ongoing audits of
various IRS activities, including efforts to modernize its
computer systems, make its systems Year 2000 compliant, and
implement the Government Performance and Results Act. With respect
the fiscal year 2000 budget request, our statement makes the
following points: * For fiscal year 2000, the administration is
requesting about $8.2 billion and 97,862 full-time equivalent
(FTE) positions for IRS--almost the same as IRS' proposed
operating level for fiscal year 1999. Although the request
reflects little change in the overall funding available to IRS,
there are some changes in how IRS plans to use the fiscal year
2000 funds. For example, the request includes about $197 million
for three initiatives-organizational modernization, implementation
of the IRS Restructuring and Reform Act of 1998 (RRA98), and
customer service training.1 These are critical initiatives. We
cannot comment on the reasonableness of the requested funding,
however, because IRS (1) is still developing plans that could
affect the costs associated with organizational modernization and
(2) did not provide us with sufficient detail to explain how some
of the estimates were developed. * Congressional oversight of
IRS' fiscal year 2000 operations could be made more complex
because (1) the fiscal year 2000 budget request is formatted in a
way that may not reflect IRS' organizational structure in fiscal
year 2000 and (2) many of the performance measures included in the
fiscal year 2000 budget request are new and two important measures
(voluntary compliance and taxpayer burden) have yet to be
developed. Both of these situations are understandable, however,
because IRS (1) has not finished planning for the organizational
modernization and (2) is in the initial stages of a major effort
to develop a more balanced set of performance measures. 1Public
Law 105-206, July 22, 1998. Page 1
GAO/T-GGD/AIMD-99-140 Statement * IRS' current 5-year cost
estimate to make its information systems Year 2000 compliant is
$1.3 billion-about $345 million higher than its March 1998
estimate. Changes in business requirements for one of IRS'
replacement projects and a decision to upgrade or replace hardware
and software for minicomputers/fileservers and personal computers
account for some of the increase. For fiscal year 2000, IRS is
requesting $250 million for its Year 2000 efforts. Most of that
amount has been allocated to the Century Date Change Project
Office and one of IRS' Year 2000 replacement projects. About $60
million of the $123.4 million allocated to the Project Office
covers funding requests for various activities that have not yet
been approved by IRS. * IRS is requesting $1.46 billion for
information systems in fiscal year 2000. IRS' plans for spending
those funds are consistent with our prior recommendations and
related congressional direction. IRS is also requesting for
fiscal year 2001 an advance appropriation of $325 million for its
multi-year capital account for systems modernization. IRS has not
adequately justified that request in accordance with federal
information technology investment requirements. Thus, Congress
should consider either not funding the request or restricting
obligation of the funds until IRS develops the requisite cost
analyses to justify the amount requested. With respect to the 1999
filing season, preliminary data show that (1) the accessibility
and quality of IRS' telephone service has deteriorated
considerably since last year, although accessibility has improved
in recent weeks; (2) the number of individual income tax returns
filed electronically is continuing to increase, although fewer
returns are being filed by telephone; (3) many taxpayers have made
mistakes with respect to the new child tax credit; and (4) new
systems for processing returns and remittances have been
performing well. For fiscal year 2000, the administration is
requesting $8.249 billion and IRS' Fiscal Year 2000 97,862
full-time equivalent (FTE) positions, including $144 million and
Budget Request 2,095 FTEs to be funded outside the
spending caps for the Earned Income Tax Credit compliance
initiative.2 As shown in appendix I, that request is Maintains
Staff and virtually the same as IRS' proposed operating
level for fiscal year 1999 Funds at the Fiscal ($8.246
billion and 97,959 FTEs). The overall increase of $3 million Year
1999 Level between the fiscal year 1999 operating level
and the fiscal year 2000 request is the net result of several
increases and decreases, the most significant of which are 2Fiscal
year 2000 will be the 3rd year of funding for this 5-year
initiative. Page 2
GAO/T-GGD/AIMD-99-140 Statement * an increase of $197 million for
various initiatives, including organizational modernization; * an
increase of $249 million to maintain current service levels; and *
a decrease of $444 million in funding for IRS' information
systems, which includes funding for information technology
investments and IRS' efforts to make its systems Year 2000
compliant. The fiscal year 2000 budget request includes $197
million for three The Reasonableness of initiatives--$140
million for organizational modernization, $40 million and
Requested Funding for 500 FTEs to implement various
provisions of RRA98, and $17 million for Initiatives Is Uncertain
training to enhance customer service. (See appendix II.)
Although we agree that these are critical initiatives for IRS to
undertake, we have no basis for determining whether the requested
funding is reasonable because IRS (1) is still developing plans
that could affect the amount of funding actually needed for
organizational modernization and (2) did not provide specific
details concerning how some of the estimates were developed.
Beginning in fiscal year 2000, IRS plans to reorganize its
operations by establishing four main operating divisions to serve
specific groups of taxpayers, including those with only wage and
investment income, small business/self-employed individuals, large
and midsize businesses, and tax exempt organizations. The
administration has requested $140 million for organizational
modernization in fiscal year 2000. According to IRS, these funds
are needed to cover the costs for employee buyouts, relocations,
and retraining in conjunction with the reorganization. We could
not assess the reasonableness of the $140 million estimate because
planning for the reorganization is ongoing. Until IRS' plans are
finalized, it will be difficult to estimate such things as
buyouts, relocation expenses, and training needs. The fiscal year
2000 budget request also includes $40 million and 500 FTEs for the
implementation of various customer service provisions in RRA98. Of
the $40 million, $27 million is being requested to implement
taxpayer protection and rights provisions, such as increased
notices and processing for innocent spouse relief and due process
in collection actions, Spanish language taxpayer assistance,
grants for low income taxpayer clinics, and enhanced toll-free
telephone and Internet access to IRS. The other $13 million is
earmarked for efforts designed to increase the use of electronic
filing. Another initiative included in the budget request calls
for enhancing customer service through improved training. For
this initiative, the administration is requesting $17 million.
According to IRS, $13 million of Page 3
GAO/T-GGD/AIMD-99-140 Statement this request is needed to
permanently increase training funds that had been reduced during
the past few years. IRS believes that its limited training funds
have contributed to a deterioration in the competency of its
employees, particularly front-line employees who have contact with
taxpayers. IRS did not provide detailed support to show how it
developed the budget estimates for implementing the RRA98
provisions and for training. This made it difficult for us to
assess whether IRS had a reasonable basis for those estimates.
While each of these three initiatives appear to be critical if IRS
is to provide first-class customer service, without additional
information it is unclear what level of funding would be adequate
for these initiatives in fiscal year 2000. Congressional oversight
of IRS' fiscal year 2000 operations could be more Oversight Could
Be complex while IRS is modernizing its structure because
(1) the budget More Complex While format may not reflect
IRS' operating structure in 2000; and (2) many performance
measures presented in the fiscal year 2000 budget request are IRS
Modernizes Its new, and two important measures-voluntary
compliance and taxpayer Structure burden-have
not been developed. The absence of a voluntary compliance
measure, for example, makes it is difficult to assess the effects
of IRS' diversion of enforcement resources to implement RRA98 and
enhance customer service. The format of IRS' fiscal year 2000
budget request may not reflect IRS' Budget Format May Not
organizational structure in fiscal year 2000. This is
understandable given Reflect IRS Operating the fact that IRS
has not finalized its restructuring plans. Until those plans
Structure in Fiscal Year are finalized, it would be premature
for IRS to revise its budget format. At 2000
the same time, however, any significant disconnect between the
existing budget structure and IRS' operating structure could make
congressional oversight more complex. The format of IRS' fiscal
year 2000 budget request is consistent with the format of IRS'
fiscal year 1999 budget and generally reflects IRS' current
operating structure. However, starting later this year, IRS will
be shifting from being geographically based in 33 districts
offices to a customer-based structure built around four major
groups of taxpayers-wage and investment income, small business and
self employed, large and mid-size business, and tax exempt.
Technology management is to be centralized, with each of the four
major operating components being the business owner for systems
that support it. IRS has not completed its planning for Page 4
GAO/T-GGD/AIMD-99-140 Statement this organizational modernization
and, thus, it is not yet clear how much change will actually take
place in fiscal year 2000 versus years after 2000 and how those
changes might affect oversight, if at all. In conjunction with its
organizational modernization, IRS is exploring plans to develop
new financial and budget structures that could aid Congress in its
oversight of IRS. We were told that IRS, as part of that effort,
would be considering the needs of this Subcommittee and other
congressional overseers. In that regard, there are two aspects of
IRS' current budget structure that could hinder effective
oversight. Those two aspects, which we discussed in our testimony
on IRS' fiscal year 1999 budget3 and which are still relevant,
involve (1) the inability to determine how many FTEs and dollars
IRS is devoting to enforcement versus assistance and (2) the lack
of a separate budget activity for the Office of the Taxpayer
Advocate. Mix Between Enforcement and Achieving IRS' mission
requires a mix of enforcement and assistance. Assistance is Not
Clear Congressional oversight would be enhanced, in our
opinion, if Congress knew how IRS was allocating its resources
between those two areas. That information cannot be derived from
IRS' budget estimates. For example, IRS is requesting $991.5
million and 20,874 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 audits handled
through correspondence and attempts to collect overdue taxes via
the telephone. The budget estimates do not show how much of IRS'
request for Telephone and Correspondence is for assistance versus
enforcement. Similarly, despite its name, the Tax Law Enforcement
appropriation is not exclusively for enforcement. The $3.3
billion and 43,677 FTEs being requested for that appropriation
include an unspecified amount of money and FTEs for various forms
of assistance, including walk-in service and taxpayer education
efforts. Finally, the $144 million and 2,095 FTEs being requested
for the EIC compliance initiative also involve a mix of assistance
and enforcement, but, again, that mix is not apparent in IRS'
budget estimates. 3Tax Administration: IRS' Fiscal Year 1999
Budget Request and Fiscal Year 1998 Filing Season (GAO/T-
GGD/AIMD-98-114, March 31, 1998). Page 5
GAO/T-GGD/AIMD-99-140 Statement Absence of a Separate Budget
The Office of the Taxpayer Advocate is responsible, among other
things, Activity for the Office of the for the resolution of
taxpayer problems through the Problem Resolution Taxpayer Advocate
Program. Because of concerns about that Office's independence,
Congress included provisions in RRA98 that, among other things,
authorized the National Taxpayer Advocate to appoint local
advocates, evaluate and take personnel action with respect to any
employee of any local advocate's office, and submit annual reports
directly to the Senate Committee on Finance and the House
Committee on Ways and Means. We believe that congressional
oversight of the Advocate's Office and IRS' efforts to solve
taxpayer problems would be further enhanced and any concerns about
the Advocate Office's independence would be further mitigated if
funding for that Office was separately identified in IRS' budget.
According to IRS, the fiscal year 2000 budget request includes
about $43.6 million and 628 FTEs for the Office of the Taxpayer
Advocate. However, those amounts are not separately identified in
IRS' budget estimates but are included within the Telephone and
Correspondence budget activity in the Processing, Assistance, and
Management appropriation.4 According to the National Director for
Budget, IRS would have had to make substantial coding changes to
its financial system to set up a separate line item for the
Advocate's Office in IRS' budget request. The National Director
explained that it would not have been practical to start
developing new financial codes for some organizational functions,
such as the Advocate's Office, when many other changes may be
needed later as IRS proceeds with its organizational
modernization. We agree that it makes sense to make all needed
changes to IRS' financial and budget structures at one time.
Until a separate budget activity is established for the Advocate's
Office, congressional oversight might be enhanced if the narrative
part of IRS' budget estimates provided data on the amount of
resources being devoted to that activity in the current year and
being requested for the coming year. IRS is changing most of its
performance measures and the way it uses The Development of
measures to focus attention on priorities, assess organizational
Performance Measures Is a performance, and identify areas
for improvement. A balanced set of Work in Process
performance measures is critical, not only for IRS management but
also for effective oversight of IRS. As explained by IRS: "It is
essential to establish appropriate quantitative performance
measures for the IRS and for its major component operations. This
is required by the Government Performance and 4According to IRS'
National Director for Budget, the Taxpayer Advocate's share of the
budget will actually be much higher than the amount included in
the request because IRS is in the process of transferring to the
Advocate's Office funding responsibility for caseworkers who had
been funded by other functions, such as Examination and Customer
Service. Page 6
GAO/T-GGD/AIMD-99-140 Statement Results Act and is essential to
the proper operation of any large organization. For this reason,
an integral part of the overall modernization program for the IRS
is the establishment of balanced performance measures which
support and reinforce achievement of the IRS' restated mission and
overall strategic goals." IRS is designing Servicewide performance
measures in support of its mission and strategic goals as well as
performance measures at the individual program level. In
September 1998, the Commissioner announced a new mission statement
for IRS. It says that the mission of IRS is to "provide America's
taxpayers top quality service by helping them understand and meet
their tax responsibilities and by applying the tax law with
integrity and fairness to all." To achieve this mission, IRS
established three strategic goals-service to each taxpayer,
service to all taxpayers, and productivity through a quality work
environment. To achieve the first goal--service to each taxpayer-
IRS plans to make filing easier; provide first quality service to
taxpayers needing help; provide prompt, professional, helpful
treatment to taxpayers in cases where additional taxes may be due;
and improve taxpayers' access to toll- free telephone assistance.
To achieve the second goal-service to all taxpayers-IRS plans to
increase fairness of compliance and overall compliance. To
achieve the third goal-productivity through a quality work
environment-IRS plans to increase employee job satisfaction and
productivity while service improves. IRS said that it is
realigning processes and activities to ensure that they support
the mission of IRS and incorporate the principles of a balanced
measurement system that focuses across three areas-business
results, customer satisfaction, and employee satisfaction.
Identifying and defining Servicewide and program level performance
measures is work in process for IRS. As shown in table III.1, IRS
has defined 15 Servicewide performance measures and has one
placeholder for a productivity measure that has yet to be defined.
Nine of the 15 Servicewide measures are new. IRS has also defined
68 measures to gauge its performance in specific functional
areas.5 (See table IIL.2.) Of the 68 program level measures, more
than half (40) are new. Understandably, the lists of measures
included with the fiscal year 2000 budget estimates are neither
final nor complete because IRS is in the process of planning its
organizational modernization and identifying performance measures.
According to IRS' National Director for Budget, 5IRS' functional
area include such activities as Submission Processing, Telephone
and Correspondence, Examination, and Collection. Page 7
GAO/T-GGD/AIMD-99-140 Statement IRS will continue to revise and
add other measures as it proceeds with the organizational
modernization and implementation of RRA98. In that regard, IRS'
list of Servicewide performance measures does not include two
critical measures-voluntary compliance and taxpayer burden. Also,
one existing Servicewide measure-toll-free level of access-is not,
in our opinion, the most appropriate measure of IRS' performance
in providing telephone service. IRS' Performance Measures Do
IRS' performance measures do not yet include any measures of
voluntary Not Address Voluntary compliance and taxpayer
burden. While performance in both areas is Compliance and
Taxpayer difficult to measure, they are two critical
indicators of IRS' performance Burden and
thus should be a vital part of any measurement system that IRS
develops. According to IRS officials, IRS recognizes the
importance of measuring these two areas of performance and plans
to continue to explore valid and reliable ways to measure them at
the strategic level to gauge IRS-wide performance. Voluntary
Compliance-IRS' Organizational Performance Management Executive
told us that IRS would be unable to measure voluntary compliance
without something similar to the discontinued Taxpayer Compliance
Measurement Program (TCMP). In the past, IRS used TCMP studies to
assess voluntary compliance among taxpayers. Those studies
involved detailed audits of valid samples of tax returns. IRS
projected the results of those audits to determine the extent of
voluntary compliance among various groups of taxpayers. IRS
conducted its last TCMP studies on returns filed for tax years
1987 and 1988. IRS abandoned the TCMP studies due to concerns
about the additional cost and burden placed on taxpayers. Since
then, IRS has not considered TCMP studies to be a viable option
for assessing voluntary compliance. Additionally, the
Organizational Performance Management Executive explained that the
TCMP studies had other limitations. For example, the TCMP studies
could not be used to gauge compliance in "real time"- either
during the tax year in question or the year after the tax year in
question. Also, IRS can not attribute all changes in compliance
to its performance because voluntary compliance can be affected by
other factors, such as the economy and geographical location. We
believe that a modified version of the TCMP studies, that reduces
the burden on taxpayers, could be useful in assessing voluntary
compliance. For example, IRS could (1) use smaller samples that
project nationwide results, (2) sample groups of taxpayers and
project the results to specific Page 8
GAO/T-GGD/AIMD-99-140 Statement groups of taxpayers, or (3)
continuously sample a small number of returns over a period of
several years. Taxpayer Burden-IRS discontinued a performance
measure it once used to gauge taxpayer burden-a ratio that
compared private sector costs to the cost for IRS to collect $100
in "net tax" revenue.6 IRS discontinued this measure because it
was based on an outdated methodology and was considered to be a
poor indicator of overall burden. IRS is currently working with a
consultant to develop a new means to measure taxpayer burden.
Additionally, results of IRS' taxpayer satisfaction surveys may
provide some valuable insights on taxpayer burden. Level of
Service Would Be a One important way that IRS helps
taxpayers understand and meet their tax More Appropriate
Servicewide responsibilities is through toll-free telephone
assistance. By calling IRS, Measure of IRS' Performance in
taxpayers can, among other things, get answers to tax law
questions, Providing Telephone Service inquire about the
status of their account, or order forms and publications. It is
important that IRS and Congress know how well IRS provides this
critical service. Toward that end, IRS has included "toll-free
level of access" as one of its Servicewide performance measures.
We believe, however, that toll-free level of access is not the
most appropriate Servicewide measure for assessing IRS'
performance in providing telephone service. The more appropriate
measure, in our opinion, is "toll- free level of service." The
only difference between these two measures, and the reason we
favor level of service, is the way in which abandoned calls are
handled in computing the measures.7 IRS computes level of access
by adding the number of calls answered and the number of abandoned
calls and dividing that sum by the total number of call attempts
(which is the sum of calls answered, calls that are abandoned, and
calls that receive a busy signal).8 Level of service is computed
by dividing the number of calls answered by total call attempts.
Thus, in effect, level of access considers abandoned calls as
successful call attempts while level of service considers them
unsuccessful. Although level of access is a useful measure
because it indicates the extent to which taxpayers are able to
access IRS' system (i.e., 6Net tax revenue is defined to include
all revenue collected (i.e. income, employment, estate and gift,
and excise taxes) less refunds. 7Abandoned calls are ones in which
the taxpayer has gained access to IRS' system but subsequently
decided, for unknown reasons, to hang up before an IRS assistor
came on the line. 8Appendix I of IRS' Fiscal Year 2000
Congressional Justification incorrectly describes this measure as
being computed by dividing calls answered by calls attempted.
That is actually the way level of service is computed. Page 9
GAO/T-GGD/AIMD-99-140 Statement not get a busy signal), it does
not indicate the extent to which taxpayers are successful in
actually talking to someone in IRS. For that reason, we believe
that level of service is the more appropriate Servicewide measure
of IRS' performance in providing telephone assistance. IRS' budget
request for fiscal year 2000 discusses the diversion of Impact of
Diversion of resources in fiscal year 1999 to implement various
provisions of RRA98 Resources Is Uncertain and to provide
assistance to taxpayers. There is insufficient information,
however, for IRS or Congress to assess the overall impact of these
diversions. RRA98 contains various provisions that give additional
protection to taxpayers (such as a relief from joint liability for
innocent spouses), shift the burden of proof from taxpayers to IRS
in certain circumstances, and make IRS liable for some legal fees
incurred by taxpayers. IRS says that it plans to divert about
2,500 FTEs and $200 million in fiscal year 1999 to implement these
provisions. According to IRS, this diversion marks the "beginning
of a continuing curtailment of some compliance activities,
primarily the examination of tax returns and the collection of
delinquent accounts." In addition, IRS says that another 200 FTEs
will be detailed from the Collection function to the Customer
Service function in fiscal year 1999 to increase the quality of
service to taxpayers through the walk- in program. Other
diversions are possible as IRS attempts to improve the quality of
its telephone service, which we discuss later. Although IRS has
made statements in the past about the potential impact of these
resource diversions on enforcement revenue, its current position
is that the monetary effect of such diversions is unknown. We
agree with that position. To correctly assess the monetary effect
of such diversions, IRS needs to be able to estimate not only the
negative effect on enforcement revenues but also the potential
positive effect on non- enforcement revenues from any improved
taxpayer service resulting from the resource diversions. It is
expected, for example, that implementation of RRA98 will result in
better service to taxpayers. Better taxpayer service could lead
to an increase in voluntary compliance, which, in turn, could lead
to increased revenues. Without a measure of voluntary compliance,
as discussed earlier, there is no way for Congress, IRS, or others
to assess such an impact. Page 10
GAO/T-GGD/AIMD-99-140 Statement IRS' efforts to make its systems
Year 2000 compliant represent one of the The 5-Year Cost
most expensive civilian agency programs.9 The current 5-year cost
Estimate for Making estimate for IRS' Year 2000
efforts is $1.3 billion-about $345 million more than its March
1998 cost estimate. IRS estimates that if its Year 2000 IRS'
Systems Year 2000 efforts are unsuccessful, the adverse effects
could include millions of Compliant Has
erroneous tax notices and delayed or erroneous refunds.
Accordingly, the Increased, and Some Commissioner of
Internal Revenue has designated this effort a top priority. Needs
for Fiscal Year IRS is requesting about $250 million
and 239 FTEs for its Year 2000 efforts 2000 Are Still
for fiscal year 2000.10 About $34 million of the $250 million is
for a contingency fund for needs that may be identified later in
calendar year Uncertain 1999. To make its
information systems Year 2000 compliant, IRS was to (1) fix
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-effective or technically
feasible, and (3) retire systems that will not be needed after the
year 2000. IRS' Year 2000 efforts include the following two major
system replacement projects: * The Service Center Mainframe
Consolidation (SCMC) project involves consolidation of IRS'
mainframe computer processing operations from 10 service centers
to 2 computing centers. Specifically, SCMC was to (1) replace
and/or upgrade mainframe hardware, systems software, and
telecommunications networks; (2) replace about 16,000 terminals
that support frontline customer service and compliance activities;
and (3) replace the system that provides security functions for
on-line taxpayer account databases with a new system called the
Security and Communications System. Replacement of the terminals
and implementation of the Security and Communications System are
critical to 9IRS' Year 2000 efforts are necessary because IRS'
information systems were programmed to read two- digit date
fields. Therefore, if unchanged, these systems would interpret
2000 as 1900, seriously jeopardizing tax processing and collection
activities. 10The $250 million is referred to as an increase in
IRS' budget request because IRS' fiscal year 1999 appropriation
did not specifically include funds for IRS' Year 2000 efforts. For
fiscal year 1999, IRS' Year 2000 efforts were funded from a
governmentwide Year 2000 fund that was established in the Omnibus
Consolidated and Emergency Supplemental Appropriations Act for
Fiscal Year 1999 (P.L. 105- 277). This Act provided $2.25 billion
in emergency funding for Year 2000 computer conversion activities
for nondefense activities. The Director of the Office of
Management and Budget (OMB) is responsible for allocating these
funds. As of February 12, 1999, OMB had released $1.56 billion;
$690 million remains available for emerging requirements. IRS
received $483.3 million from the fund, of which $358.3 million is
to be used for Year 2000 activities. According to Department of
the Treasury budget documents, Congress earmarked the remaining
$125 million for other information systems investments that were
initially included in IRS' fiscal year 1999 budget request. Page
11
GAO/T-GGD/AIMD-99-140 Statement IRS' achieving Year 2000
compliance. * The Integrated Submission and Remittance Processing
System (ISRP) is to replace IRS' two primary tax return and
remittance input processing systems (the Distributed Input
Processing System and the Remittance Processing System) with a
single system that is to be Year 2000 compliant. IRS established a
goal to complete most of its Year 2000 work by January 31, 1999,
to help ensure that it would (1) have a Year 2000 compliant
environment implemented for the 1999 filing season and (2) provide
time for resolving any problems that surfaced during the 1999
filing season and its Year 2000 end-to-end testing. For fiscal
year 2000, IRS is requesting (1) $123.4 million for the activities
of the Century Date Change (CDC) Project Office, which oversees
the conversion and testing of changes made to existing systems;
(2) $100.6 million for SCMC; and (3) $26.4 million for ISRP. The
5-year cost estimate for IRS' Year 2000 efforts increased by
$345.2 5-Year Cost Estimate million between
March 1998 and March 1999. In March 1998, the 5-year Increased
cost estimate for fiscal years 1997 through 2001 was about $1
billion; IRS' current cost estimate is $1.35 billion. Table 1
shows that the activities under the purview of the CDC Project
Office and SCMC account for most of the increase. Table 1: 5-Year
Cost Comparison (in
Fiscal years Fiscal years Millions)
19972001 19972001 (March 1998 (March
1999 Spending category estimate)
estimate) DIfference CDC Project Office
$572.0 $701.4 $129.4 SCMC
332.2 499.8 167.6 ISRP
101.7a 149.9 48.2 Total
$1,005.9 $1,351.1 $345.2 aDoes not include
estimates for fiscal years 2000 and 2001. IRS budget documents
indicate that these estimates were identified in April 1998. If
these amounts are included, the ISRP cost estimate is $146.3
million-only $3.6 million less than the current estimate. Source:
IRS' Year 2000 cost summaries for fiscal years 19972001. CDC
Project Office The CDC Project Office is
responsible for (1) overseeing efforts to fix over 60 million
lines of application software, (2) ensuring that hardware and
systems software are compliant, and (3) overseeing the Year 2000
testing of IRS' information systems. As shown in table 1, IRS' 5-
year cost estimate for CDC increased by $129.4 million between
March 1998 and March 1999. Most of the increase-$99 million-is for
fiscal year 1999. Page 12
GAO/T-GGD/AIMD-99-140 Statement We had difficulty identifying
which aspects of the CDC Project Office budget accounted for all
of the $99 million increase because at the time IRS officials
developed the March 1998 estimate they were still refining their
Year 2000 needs. At that time, IRS had allocated about $50
million to a contingency fund that was to become available for
needs as they emerged. According to IRS officials, for those
needs that were defined as of March 1998, the largest cost
increases are for certain contractor services and for computer
hardware and software for IRS' personal computers and
minicomputers/file servers. As we noted in our June 1998 report on
IRS' Year 2000 efforts, IRS placed priority on assessing and
fixing its mainframe computers, which encompass most of IRS' tax
processing systems.11 Accordingly, the needs for IRS'
minicomputers/file servers and personal computers were less
defined at that point in time. For example, since developing the
March 1998 estimate, IRS has decided to replace about 35,000
personal computers and the associated systems and commercial off-
the-shelf software. As part of this replacement effort, IRS plans
to reduce the number of commercial software and hardware products
for personal computers in its inventory from about 4,000 to 60
core standard products. Table 2 shows the CDC Project Office's
spending categories and associated dollar amounts for fiscal year
1999 as of February 23, 1999. 11IRS' Year 2000 Efforts: Business
Continuity and Contingency Planning Needed for Potential Year 2000
Failures (GAO/GGD-98-138, June 15, 1998). Page 13
GAO/T-GGD/AIMD-99-140 Statement Table 2: CDC Project Office
Spending Spending category
Amount (in millions) Categories and Associated Dollar
Personal computers
$51.0 Amounts for Fiscal Year 1999 End-to-end testinga
48.2 Labor and discretionary
38.3 Program inventory and management
23.2 Applications and development
19.6 Minicomputers/file servers
16.7 Telecommunications
14.0 Noninformation technology
9.2 Contingency fund
8.8 Independent ver ification and validationb
8.8 Mainframe computers
1.1 Total
$239.0c aThe end-to-end test is to verify that a defined set of
interrelated systems, which collectively support a business
function, interoperate as intended in an operational environment.
The test is to have two parts-the first part is scheduled from
April to July 1999; the second part is scheduled from October to
December 1999. bProvides for an organization that is technically,
managerially, and financially independent of the systems
developers to assess, among other things, whether a system meets
the user's requirements. cTotal does not add due to rounding.
Source: CDC budget data. We cannot comment on the adequacy of the
amounts that IRS has allocated to each of these categories.
However, as we would have expected, IRS has allocated large
portions of its budget to those major Year 2000 activities that
are to be completed in fiscal year 1999-the replacement effort for
its personal computers and its end-to-end testing activities. To
help ensure that agencies have sufficient funds for Year 2000
activities, OMB has authority to release funds from the
government-wide Year 2000 fund. OMB notified agencies to request
funding for unforeseen requirements as they emerge. Accordingly,
in March 1999, after allocating the $8.8 million in its
contingency fund, IRS requested an additional $35 million from the
OMB Year 2000 fund to cover the net unfunded needs for fiscal year
1999. As of March 1999, OMB had approved $22.3 million.12 IRS'
fiscal year 2000 budget request includes $123.4 million for the
CDC Project Office. According to CDC Project Office budget
documents, as of March 31, 1999, about $29 million of the $123.4
million has been allocated, primarily for CDC Project Office labor
and discretionary costs. The CDC 12IRS requested funds for
several activities such as contingency planning,
telecommunications, minicomputers/file servers, and independent
verification and validation. OMB approved funding for most of the
areas, but reduced the amount for some areas. According to IRS
officials, OMB approved funding for those areas in which IRS had
demonstrated an actual need and not for anticipated needs. For
example, an anticipated need would include any fixes that might be
needed as a result of end-to- end testing. Page 14
GAO/T-GGD/AIMD-99-140 Statement Project Office has received
funding requests for about $60 million which are still subject to
approval, leaving a contingency amount of about $34 million. IRS
officials said that the contingency funds are to be used for needs
that may be identified through (1) end-to-end testing, (2) risk
management activities,13 (3) Year 2000 contingency plans for IRS'
core business processes,14 and (4) an independent review of IRS'
application software and commercial off-the-shelf software Year
2000 changes. SCMC SCMC cost
increases account for $167.6 million of the $345.2 million
increase in the 5-year Year 2000 cost estimate. As shown in table
3, IRS' March 1998 cost estimate for SCMC was $332.2 million,
compared to its current cost estimate of $499.8 million. Table 3:
Comparison of March 1998 and Year of FY 1997
March 1999 SCMC 5-Year Cost estimatea
actual FY 1998b FY 1999
FY 2000 FY 2001 Total Estimates
March 1998 estimate 43.8
167.3 76.0 38.4
6.7 $332.2c March 1999 estimate
43.8 168.3 111.6
97.3 78.8 $499.8 Difference
0 1.0 35.6 58.9
72.1 $167.6 aEstimate includes only contractor costs,
except where noted. According to IRS officials, there are $64
million in additional costs excluded from the estimates. As of
March1999, these costs include (1) additional IRS staffing costs
of $32 million, (2) $20 million for maintenance costs in the seven
service centers that have not yet had their tax processing
activities moved to the computing centers, and (3) $12 million in
relocation and training costs for fiscal years 1999, 2000, and
2001. bAccording to SCMC officials, the estimates for fiscal year
1998 also include relocation, training, and IRS staffing costs.
cIn March 1998, IRS' cost estimate for the Year 2000 portions of
SCMC was $265 million. IRS no longer reports SCMC Year 2000 costs.
Source: SCMC expenditure and budget documents. When we testified
in March 1998, we said that two of the factors that had the
potential to increase SCMC costs were pending expanded business
requirements and schedule delays. According to IRS officials,
those two factors together with a decision to upgrade one of the
tax processing systems, ultimately contributed to cost increases.
13IRS' CDC Project Office outlined a risk management process that
is to, among other things, (1) identify risks to the successful
completion of Year 2000 goals, (2) coordinate the development of
risk mitigation strategies, and (3) oversee the execution of these
strategies. 14In our June 15, 1998, report, we said that IRS' Year
2000 contingency planning efforts fell short of meeting the
guidelines included in our Year 2000 Business Continuity and
Contingency Planning Guide. Accordingly, we recommended that IRS
take steps to broaden its contingency planning efforts to help
ensure that it had adequately assessed the vulnerabilities of its
core business processes to potential Year 2000 induced failures.
In response to our recommendations, IRS determined that it needed
to develop 37 contingency plans to address various Year 2000
failure scenarios for its core business processes. IRS officials
told us that 26 plans were done as of March 31, 1999; the
remaining 11 plans are to be completed by May 31, 1999. Page 15
GAO/T-GGD/AIMD-99-140 Statement According to IRS officials, IRS'
fiscal year 2000 budget request of $100.6 million15 for SCMC
reflects much of the costs associated with implementing expanded
requirements and the contractor costs, staff relocation costs, and
training costs for moving the tax processing activities of five
service centers in fiscal year 2000. According to SCMC officials,
cost estimates for fiscal years 2000 and 2001 could decrease
because (1) they believe the contractor's cost estimates may be
overstated and (2) some SCMC activities may be funded from IRS'
Operations and Maintenance budget activity as systems are fully
implemented. According to SCMC officials, expanded business
requirements for disaster recovery16 and a decision to upgrade the
hardware and software for one of its tax processing systems17
account for the vast majority of the $167.6 million increase in
the 5-year cost estimate for SCMC. For disaster recovery, IRS
plans to obtain contractor services and purchase hardware,
software, and related telecommunications for its tax processing
mainframe computers and telecommunications networks. SCMC
officials said that the tax processing system upgrade is to (1)
increase production capacity and disaster recovery capabilities,
(2) provide the necessary systems architecture for IRS' planned
modernization blueprint, and (3) provide substantial savings by
reducing the hardware, software, and maintenance costs associated
with the existing system. According to SCMC officials, the need to
have contractor staff on board longer than anticipated to
accommodate schedule delays accounts for some of the $167.6
million cost increase. Specifically, in March 1999, IRS decided
to delay moving the tax processing activities of five service
centers, instead of completing these moves in 1999.18 15This
$100.6 million includes $3.3 million in relocation and training
costs that is not included in the March 1999 estimate for fiscal
year 2000 shown in table 3. 16Disaster recovery refers to the
procedures or plans for responding to the loss of an information
system due to flood, fire, or computer virus. Under the original
SCMC disaster recovery plan, in the event of a disaster, 70
percent of the computing center's processing capability was to be
restored in 36 hours. Under the expanded requirements, 100 percent
of the processing capability is to be restored in 6 hours. 17This
tax processing system encompasses IRS' automated collection
function and the print capabilities for notices to taxpayers.
18This decision represents the second significant schedule change
for SCMC. Originally, IRS had planned to have the tax processing
activities of the 10 service centers moved to the computing
centers by the end of calendar year 1998. In May 1998, IRS
revised the schedule and established two new schedules-one for the
Year 2000 portion of SCMC and another for the tax processing
activities. The Year 2000 portion was to be completed by December
31, 1998. The schedule for tax processing activities called for
moving the activities of five service centers by 1998 and the
remaining five service centers in calendar year 1999. As of
January 31, 1999, IRS had completed the Year 2000 portion of Page
16
GAO/T-GGD/AIMD-99-140 Statement IRS officials cited several
reasons for changing the SCMC schedule. Specifically, IRS'
business organizations had limited involvement in SCMC during its
early stages. As their involvement increased, they expressed
concern about the ambitious schedule and helped identify certain
critical success factors that needed to be addressed for SCMC to
be successful. Some of these critical success factors include (1)
fully implementing the automated processes associated with the
consolidations before the service centers' tax processing
activities were moved to the computing centers, (2) providing
adequate numbers and types of staff in the service centers and
computing centers, and (3) developing new business procedures for
operating under consolidation. Also, SCMC officials said that the
original schedule did not acknowledge that new issues might
surface during each move because of operational differences among
the service centers. According to IRS officials, the revised
schedule provides additional time for addressing these issues.
Beginning in 1995, we reported on serious and pervasive
information Information technology (IT) management and
technical weaknesses. Since then, we Technology Budget: have
monitored IRS' progress in implementing our recommendations to
correct these weaknesses and have reviewed IRS' annual budget
requests Observations and to ensure that they are consistent
with IRS' modernization capability and Suggestions are
otherwise adequately justified. IRS' IT budget request for fiscal
year 2000 includes $1.46 billion and 7,399 FTEs to fund such
things as operation and maintenance of existing systems,
activities to make IRS' systems Year 2000 compliant, correction of
IT management weaknesses, and development of systems to sustain
IRS operations until IRS is ready to modernize. These funding
categories for fiscal year 2000 are consistent with our prior
recommendations and related congressional direction concerning IT
spending. In addition to the $1.46 billion, IRS is requesting for
fiscal year 2001 an advance appropriation of $325 million for IRS'
multiyear capital account for systems modernization, referred to
as the "Information Technology Investments Account" (ITIA).
However, IRS has not adequately justified this ITIA request
because IRS has not yet developed its modernization strategic plan
and supporting cost-benefit analyses for proposed system
investments. Accordingly, we suggest that Congress consider
either denying (i.e., not funding) the $325 million advance
request or restricting SCMC and moved the tax processing
activities of three service centers. In March 1999, IRS revised
the schedule for moving the tax processing activities. Under the
revised schedule, two additional moves are to occur in calendar
year 1999, four in calendar year 2000, and one in early January
2001. Page 17
GAO/T-GGD/AIMD-99-140 Statement its obligation until IRS develops
the requisite cost analyses to justify the amount requested, which
IRS plans to do by September 30, 1999. In July 1995, we reported
on serious management and technical IRS Acting to Correct IT
weaknesses with IRS' modernization and made over a dozen
Management and Technical recommendations to help IRS build the
capability necessary to Weaknesses
successfully modernize it systems.19 In June 1996, we reported
that IRS had made progress in implementing our recommendations.20
However, to minimize the risk of IRS investing in systems before
the recommendations were fully implemented, we suggested that
Congress limit IRS' IT spending to certain cost-effective
categories. These spending categories were those that (1) support
ongoing operations and maintenance; (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
appropriations21and the related conference report limited IRS' IT
spending to efforts consistent with these categories. In 1997, IRS
continued to address our recommendations. For example, in May
1997, IRS issued its modernization blueprint. We briefed IRS
appropriations and authorizing committees on the results of our
assessment of IRS' modernization blueprint in September 1997. In
those briefings and in a subsequent report, we concluded that the
modernization blueprint was a good first step that provided a
solid foundation from which to define the level of detail and
precision needed to effectively and efficiently build a modernized
system of interrelated systems.22 However, we also noted that the
blueprint was not yet complete and did not provide enough detail
for building and acquiring new systems. As a result, the
conference report accompanying IRS' fiscal year 1998
appropriations act again limited IRS' fiscal year spending to
efforts that were consistent with the aforementioned spending
categories. IRS' fiscal year 1999 19Tax Systems Modernization:
Management and Technical Weaknesses Must Be Corrected If
Modernization Is To Succeed (GAO/AIMD-95-156, July 26, 1995).
20Tax Systems Modernization: Actions Underway But IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106,
June 7, 1996). 21Public Law 104-208, September 30, 1996. 22Tax
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). Page 18
GAO/T-GGD/AIMD-99-140 Statement appropriation act and conference
report continued these spending limitations.23 In its budget
requests for fiscal years 1998 and 1999, IRS requested over $1
billion for ITIA. In our testimonies before this Subcommittee on
these requests, we questioned the justification for these funds
because (1) all or major parts of the amounts being requested were
not based on analytical data or derived using formal cost
estimating techniques, as required by OMB, and (2) IRS had not yet
developed the capability to modernize.24 Subsequently, Congress
provided $506 million for the account. Specifically, it
appropriated $325 million in fiscal year 1998, of which $30
million it rescinded in May 1998 for urgent Year 2000 century date
change requirements. Congress also provided $211 million in
fiscal year 1999. In providing these sums, Congress prohibited
their obligation until IRS and the Department of the Treasury
submitted to Congress for approval an expenditure plan that (1)
implements IRS' modernization blueprint; (2) meets OMB investment
guidelines; (3) is reviewed and approved by OMB and Treasury's IRS
Management Board and is reviewed by us; (4) meets requirements of
IRS' life cycle program; and (5) is in compliance with acquisition
rules, requirements, guidelines, and systems acquisition
management practices of the federal government. In December 1998,
IRS awarded its Prime Systems Integration Services Contract
(PRIME) for systems modernization. IRS is working with the PRIME
and other support contractors to develop a strategic business
systems plan and complete the modernization blueprint, as we
recommended, and to account for (1) changes in system requirements
and priorities caused by IRS' organizational modernization and (2)
changes to accommodate new technology and to implement RRA98
requirements. IRS is also working with the PRIME to establish
disciplined life cycle management processes and structures,
including mature software development and acquisition
capabilities, before IRS begins building modernized systems. By
June 30, 1999, IRS plans to have these processes and structures in
place and have the necessary approvals to begin using ITIA funds
to modernize systems. By September 30, 1999, IRS also plans to
have its strategic business systems plan for the entire
modernization, which is to identify the systems to be modernized
over the next 5 years, their estimated costs, business case
justification, the sequence in which 23Public Law 105-277, October
21, 1998. 24GAO/T-GGD/AIMD-98-114 and 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). Page 19
GAO/T-GGD/AIMD-99-140 Statement they will be developed and
deployed, and the architecture standards governing their
development. IRS' fiscal year 2000 request of $1.46 billion for
information systems Fiscal Year 2000 appears
consistent with the aforementioned spending categories.
Information Systems Specifically, 78 percent of the
request, or $1.14 billion, is to (1) operate and Budget Request Is
in Line maintain information systems that support tax
administration, (2) With GAO and consolidate
mainframe computing from 10 centers to 2, and (3) restructure the
information systems organization. Seventeen percent of the
request, or Congressional Spending $250 million, is for Year
2000 conversion activities. The remaining 5 Categories
percent, or $66 million, is for initiatives to correct IT
management weaknesses or to develop systems to sustain IRS
operations until it implements modernized systems. For example,
funding from this activity is to be used to complete and implement
the modernization blueprint, including establishing system life
cycle management processes. Key provisions of the Clinger-Cohen
Act, the Government Performance IRS Has Not Adequately and
Results Act, and OMB Circular No. A-11 and supporting memoranda,
Justified Its Fiscal Year require that, before requesting
multiyear funding for capital asset 2001 ITIA Request
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 investments (1)
support a critical agency mission; (2) are justified by life cycle
cost-benefit analyses; and (3) have cost, schedule, and
performance goals. IRS has not performed the requisite analyses to
justify its fiscal year 2001 investment account request of $325
million because the information it needs to prepare such analyses
will not be available until IRS completes its strategic business
planning in September 1999. Consequently, IRS was unable to base
its budget request on a clear and complete definition of fiscal
year 2001 IT investments and did not justify these investments
with cost-benefit analyses. Instead, IRS officials told us that
they needed to develop an estimate for the fiscal year 2000 budget
process in order to ensure that funds would be available for
modernization in fiscal year 2001. These officials stated that if
they did not have a budgetary "placeholder" for modernization, IRS
faced the possibility of a funding shortfall in fiscal year 2001
when IRS plans to be building modernized systems. Consequently,
IRS developed its budget request using (1) cost estimates from its
March 1998 PRIME request for proposal (RFP) and (2) a cost
estimate that was documented following our inquiries and using
what IRS termed "rough order of magnitude" cost estimating
processes. However, these estimates have shortcomings. First,
IRS officials acknowledged that the RFP cost estimates are out-of-
date and are for IT projects underway Page 20
GAO/T-GGD/AIMD-99-140 Statement now and not planned for fiscal
year 2001. Second, the "rough order of magnitude" estimate lacked
verifiable analysis and supporting data. Finally, neither estimate
was based on a specified set of fiscal year 2001 IT investments
because these investments have yet to be defined. We support IRS'
efforts to first strengthen its modernization capability and
Matter for Consideration by then acquire modernized systems.
However, IRS' fiscal year 2001 request the Congress
for ITIA funds is not justified in accordance with federal IT
investment requirements. Accordingly, we suggest that Congress
consider either denying (i.e., not funding) the $325 million
advance request or restricting its obligation until IRS develops
the requisite cost analyses to justify the amount requested, which
IRS plans to do by September 1999. Neither of these congressional
actions should impact fiscal year 1999 and 2000 modernization
efforts because the ITIA has enough funds to cover IRS' proposed
spending in both years. Specifically, of the $506 million in the
ITIA, IRS plans to spend about $361 million during fiscal years
1999 and 2000-$79 million and $282 million, respectively-which
will leave $145 million for fiscal year 2001. At the request of
this Subcommittee, we are reviewing IRS' performance Preliminary
Data on during the 1999 tax filing season. Our
preliminary work has shown some mixed results. Specifically, (1)
taxpayers have experienced a significant the 1999 Filing Season
decline in IRS' telephone service, although service has improved
in recent Show Mixed Results weeks; (2) the number
of individual income tax returns filed electronically has
continued to increase, although the number filed over the
telephone has decreased; (3) there appears to be a significant
amount of confusion among taxpayers with respect to the new child
tax credit; and (4) new computer systems for processing returns
and remittances appear to be performing well. According to IRS'
data, taxpayers who called IRS with tax questions during
Significant Decline in the first few weeks of the 1999
filing season had considerable difficulty Telephone Service
reaching IRS on the telephone and, once they did reach IRS,
getting an accurate answer to their questions. Although that
situation has improved in recent weeks, IRS' performance overall
has declined significantly compared to its level at the same point
in time last year. Page 21
GAO/T-GGD/AIMD-99-140 Statement Ability of Taxpayers to Reach
Over the last few years, there has been a steady increase in the
ability of IRS on the Telephone Has taxpayers
to reach IRS by telephone. This year, however, there have been
Worsened Since Last Year serious problems. As
shown in table 4, IRS data for the first 3 months of this filing
season compared to the same period last year show a significant
decline in IRS' performance.25 Table 4: Toll-Free-Telephone Level
of
1999 1998 Access and Level of Service for
the First (a) Calls answered
27.9 29.6 3 months of the 1999 and 1998
Filing (b) Calls abandoned
7.3 6.5 Seasons (in Millions)
(c) Subtotal-Calls that got into IRS' system
35.2 36.1 (d) Busy signals
16.9 3.5 (e) Total call attempts
52.1 39.6 Level of accessa
68% 91% Level of serviceb
54% 75% Percent of calls that received
busy signalsc
32% 9% Percent of calls that got into
IRS' system but were abandonedd
21% 18% Note: Data are for January 1
through March 27, 1999, and January 1 through March 28, 1998.
aLevel of access is the sum of the number of calls answered plus
the number of calls abandoned divided by the total call attempts--
computed in this table by dividing row (c) by row (e). bLevel of
service is the number of calls answered divided by the total call
attempts--computed in this table by dividing row (a) by row (e). c
Computed in this table by dividing row (d) by row (e). dComputed
in this table by dividing row (b) by row (c). Source: GAO
analysis of data in IRS' Weekly Customer Service Report. The
significant declines in level of access (from 91 percent to 68
percent) and level of service (from 75 percent to 54 percent) come
at a time when IRS, in an attempt to improve service, extended its
operating hours to 24 hours a day, 7 days a week. Cognizant IRS
officials have mentioned several factors that they believe
contributed to the declines in telephone access and service. One
factor was IRS' decision to discontinue the use of a procedure
that it had used in 1997 and 1998 to handle calls involving
complex tax topics. Under that procedure, callers with questions
in certain complex areas of the tax law, such as self-employment
income and sale of a residence, were automatically connected to a
voice messaging system. They were instructed to leave their name,
address, telephone number, and the best time for IRS to call them
back. Within 2 to 3 business days, an IRS employee knowledgeable
in that area of the tax law was to return the taxpayer's call.
During our review of the 1997 filing season, IRS told us 25In
reporting telephone data, IRS combines data on six of its toll-
free telephone lines-tax law assistance, Earned Income
Credit/refund inquiry, account inquiry, forms ordering, Automated
Collection System, and the fraud hotline. Page 22
GAO/T-GGD/AIMD-99-140 Statement that it decided to use this
procedure after a study showed that calls dealing with complex
topics involved 20- to 30-minute telephone conversations and that
an assistor could answer about 5 simpler calls in that same amount
of time. According to cognizant officials, IRS decided to
discontinue the use of voice messaging for complex topics because
they expected to have sufficient staff available in 1999 to allow
all calls to be directed to "live" assistors. There was also some
concern that IRS was not providing the best possible service when
it asked taxpayers to leave a message and wait a few days for a
return call. Thus, IRS started this filing season by attempting
to answer all taxpayer calls with live assistors. Other
contributing factors mentioned by IRS officials included *
unanticipated staffing problems associated with the expansion to
24 hours- a-day, 7 days-a-week service; * start-up issues
associated with IRS' new call routing system; and * the lack of
reliable data on accessibility during the first weeks of the
filing season. IRS has taken steps to address these contributing
factors. For example, during the week of February 15, 1999, IRS
reestablished the use of the messaging system for questions
involving certain tax law topics. IRS' actions appear to have had
a positive effect. In that regard, IRS' data show that telephone
accessibility and service have improved in recent weeks. For
example, IRS data on calls received during the week of March 21
through 27, 1999, showed an 83 percent level of access and a 66
percent level of service during that week-significantly better
than the cumulative percentages shown in table 4.26 The Accuracy
of IRS' Answers to IRS data show that taxpayers are more likely to
receive inaccurate Tax Law Questions Has Also responses
to their tax law questions this year compared to last. IRS
Declined checks the quality of its
telephone service by monitoring a sample of telephone calls. IRS'
monitoring during the period October 1, 1998, through February 28,
1999, showed that the accuracy rate had dropped 11 percentage
points (from 80 percent to 69 percent) compared to the same time
period a year ago. Although still well behind last year, the 69
percent accuracy rate as of the end of February 1999 is better
than the 66 percent rate that IRS reported as of the end of
January 1999. 26For the same week in 1998, IRS reported a 91
percent level of access and a 72 percent level of service. Page 23
GAO/T-GGD/AIMD-99-140 Statement According to a cognizant IRS
official, the decline in quality compared to 1998 can be
attributed to many of the same factors that contributed to the
decline in telephone accessibililty. For example, the decision to
stop using voice messaging required customer service
representatives to handle complex topics that they were not
responsible for last year. As noted in our report on the 1998
filing season, the number of returns Use of Electronic Filing
filed electronically increased about 28 percent between 1996 and
1997 and Continues an Upward Trend about 28 percent again in
1998.27 According to IRS data, as shown in table 5, that growth
is continuing, although at a reduced rate. Table 5: Individual
Income Tax Returns
Percent Percent
Received by IRS (in Thousands)
1/1/97 to 1/1/98 to change:
1/1/99 to change: Filing type
4/04/97 4/03/98 1997 to 1998
4/02/99 1998 to 1999 Paper Traditional
45,306 42,470 -6.3
41,538 -2.2 1040PCa
4,488 3,534 -21.3
3.084 -12.7 Subtotal
49,794 46,004 -7.6
44,622 -3.0 Electronic Traditionalb
13,007 16,306 25.4
20,167 23.7 TeleFilec
4,072 5,116 25.6
4,829 -5.6 Subtotal
17,079 21,422 25.4
24,996 16.7 Total
66,873 67,426 0.8
69,618 3.3 aUnder 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. bTraditional electronic filing involves the transmission
of returns over communication lines through a third party, such as
a tax return preparer or electronic return transmitter, to an IRS
service center. cUnder TeleFile, certain taxpayers that 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 5 shows,
although there has been an overall increase in electronic filing,
there has been a decrease in one form of electronic filing-
TeleFile. It is unclear at this point why the use of TeleFile has
declined. It is also unclear whether there are any particular
factors that primarily account for the overall increase in
electronic filing. One factor that may be contributing to the
increase in electronic filing this year, but which has broader
implications for future years, is IRS' effort to find workable
alternatives to paper signatures. Generally, taxpayers using the
traditional form of electronic filing have to send IRS a paper
signature form along with copies of their Forms W-2. The fact
that electronic filing 27Tax Administration: IRS' 1998 Tax Filing
Season (GAO/GGD-99-21, Dec. 31, 1998). Page 24
GAO/T-GGD/AIMD-99-140 Statement has not been completely paperless
has been cited as a major barrier to its greater use. In that
regard, IRS has been conducting tests this year directed at making
electronic filing truly paperless by allowing participants to use
electronic signatures and by waiving the need for participants to
send their W-2s to IRS.28 In one test, for example, taxpayers are
to choose a personal identification number to use when filing
through certain tax preparers. We will be following up on the
results of these tests as we continue our review of the filing
season. The individual income tax returns being filed this year
include, for the first The New Child Tax Credit time, the
opportunity for eligible taxpayers to claim a child tax credit.
Has Been the Source of According to IRS data, of about 1.88
million error notices sent to taxpayers Many Taxpayer Errors
as of March 12, 1999, about 202,000 (almost 11 percent) involved
errors with the child tax credit. Those errors generally involved
taxpayers either (1) miscalculating the credit or (2) not claiming
the credit even though they appear to be eligible. With respect to
the latter, taxpayers are to indicate whether a dependent is a
qualifying child for purposes of the child tax credit by checking
a box on the front of the Individual Income Tax Return (Form 1040
or Form 1040A). They are then to use a worksheet included in the
Form 1040/1040A instructions to compute the amount of their
credit, if any, and enter that amount on the back of the form.
According to data from IRS' Taxpayer Usage Study, which is a
sample of filed individual income tax returns, about 36 percent of
the returns filed as of March 12, 1999, included dependents that
the taxpayer indicated, by a checkmark on the front page, were
qualifying children for the child tax credit. However, the same
data show that only about 24 percent of the returns filed as of
that date claimed the credit. Thus, about one-third of the
taxpayers who indicated eligibility for the credit did not claim
it. This apparent discrepancy may be an indicator of the
complexity of the new credit or may just reflect taxpayer
oversight. Some of the discrepancy could also be explained by the
possibility that taxpayers, after completing the worksheet, found
that they were ineligible for the credit and, therefore, did not
claim it. Last month, IRS changed its procedure for processing
returns when taxpayers do not claim a child tax credit even though
they indicate on the front of the return that they have one or
more dependents who qualify for 28According to a cognizant IRS
official, IRS can waive the submission of W-2s because there is no
statutory requirement that these forms be attached to tax returns.
Page 25
GAO/T-GGD/AIMD-99-140 Statement the credit. Initially, IRS'
procedure called for adjusting the taxpayer's return to include
the credit if information on the return indicated that the
taxpayer met the adjusted gross income test and certain other
eligibility criteria. However, the procedure did not require
verification of the qualifying child's age.29 IRS modified its
procedure in March by instructing service centers to do research
to determine if the child meets the age criteria before adjusting
the return. If the research determines that the taxpayer
qualifies for the credit, the service center is to adjust the
taxpayer's return and include the credit. If the research
determines that the taxpayer does not qualify for the credit, the
service center is to process the return as filed (i.e., without
the credit). If the research is inconclusive, the service center
is to process the return as filed but notify the taxpayers that
they (1) may be eligible for the credit and (2) should file an
amended return to claim the credit, if they determine that they
are eligible. Our work to date has not identified any significant
disruption of IRS' Computer Systems ability to process returns
and issue refunds that might be indicative of Performing Well
computer-related problems. IRS has made major changes this year to
the computer systems it uses to process returns and remittances.
One major change involved replacement of the returns processing
system at all 10 service centers and replacement of the remittance
processing system at 6 centers. According to an IRS spokesperson
for that project and processing officials at one service center,
the transition to the new systems has gone well, and workloads are
being processed as intended. A second major change involves the
consolidation of mainframe service center computer equipment at
IRS' two computing centers in Martinsburg, WV, and Memphis, TN.
So far, three service centers have undergone consolidation.
According to a cognizant official at one of those centers, the
consolidation has not adversely affected the center's ability to
process returns. That concludes my statement. We welcome any
question that you may have. 29A qualifying child, for purposes of
this credit, is a son, daughter, adopted child, grandchild,
stepchild, or foster child who (1) is claimed as a dependent, (2)
is a U.S. citizen or resident alien, and (3) was under the age of
17 at the end of the tax year. Page 26
GAO/T-GGD/AIMD-99-140 Page 27 GAO/T-GGD/AIMD-99-140 Appendix I
IRS' Fiscal Year 2000 Budget Request Compared With Proposed Fiscal
Year 1999 Operating Level Dollars in thousands
FY 1999 FY 2000
Percent change Budget activity Dollars
FTEs Dollars FTEs In dollars
In FTEs Submission Processing $884,000
15,384 $973,599 15,475 10.14
0.59 Telephone and Correspondence 812,651
19,650 991,456 20,874 22.00
6.23 Document Matching 60,683
1,555 60,395 1,555 -0.47
0.00 Inspectiona 0000 N A N
A Management Services 563,122
6,952 615,941 6,652 9.38
-4.32 Rent and Utilities 664,322
135 671,144 135 1.03
0.00 Subtotal: Processing, Assistance, and Management
Appropriation $2,984,778 43,676
$3,312,535 44,691 10.98 2.32
Criminal Investigation 367,099
3,824 374,306 3,824 1.96
0.00 Examination 1,717,775
23,768 1,835,346 23,588 6.84
-0.76 Collection 679,385
11,195 707,411 11,095 4.13
-0.89 Employee Plans and Exempt Organizations
139,845 2,055 148,999 2,109
6.55 2.63 Statistics of Income
27,513 464 28,731 479
4.43 3.23 Chief Counsel
232,572 2,582 242,045 2,582
4.07 0.00 Subtotal: Tax Law Enforcement
Appropriation $3,164,189
43,888 $3,336,838 43,677 5.46
-0.48 Operations and Maintenance 1,166,583
8,000 1,138,814 6,976 -2.38
-12.80 Year 2000 0
0 250,426 239 NA
NA Investments 92,947
184 66,161 184 -28.82
0.00 Subtotal: Information Systems Appropriation
$1,259,530 8,184 $1,455,401 7,399
15.55 -9.59 Information Technology Investmentsb
$211,000 0 0 0
NA NA Year 2000 Emergency Fundc (outside caps)
$483,300 239 0 0
NA NA Earned Income Credit (outside caps)
$143,000 1,972 $144,000 2,095
0.70 6.24 Total
$8,245,797 97,959 $8,248,774 97,862
0.04 -0.10 aIn accordance with Public Law 105-206,
the IRS Inspection activity was transferred to the Treasury
Inspector General for Tax Administration on January 19, 1999. bNew
funding for fiscal year 2000 is not needed since IRS will use
carryover balances; however, IRS is requesting an advance
appropriation of $325 million in fiscal year 2001 for funding of
the Prime Systems Integration Services Contract. cFor fiscal year
1999, IRS' Year 2000 efforts were funded from a governmentwide
Year 2000 fund that was established in the Omnibus Consolidated
and Emergency Supplemental Appropriations Act for Fiscal Year 1999
(P.L. 105-277). Source: IRS' February 1, 1999, budget estimates
for fiscal year 2000. Page 28
GAO/T-GGD/AIMD-99-140 Appendix II Comparison of IRS' Fiscal Year
1999 Proposed Operating Level and Fiscal Year 2000 Budget Request
Dollars in thousands Subtotal
Total Fiscal year 1999 proposed operating level
$8,245,797 Decreases for fiscal year 2000 IT investment (non-
recur) $211,000 Year 2000 emergency
fund (non-recur)
483,300 Absorption of mandatory non-labor costs
50,566 Subtotal-decreases
$744,866 Increases for fiscal year 2000 Adjustments necessary to
maintain current levels
$299,369 Year 2000 conversion
250,426 Organizational modernization
140,000 RRA98
40,000 Customer service training
17,048 Increase in Earned Income Tax Credit compliance initiative
1,000 Subtotal-increases
$747,843 Fiscal year 2000 budget request
$8,248,774 Source: IRS' Fiscal Year 2000 Congressional
Justification. Page 29
GAO/T-GGD/AIMD-99-140 Appendix III IRS Performance Measures Tables
III.1 and III.2 show the Servicewide and program performance
measures included in IRS' February 1, 1999, budget estimates for
fiscal year 2000. IRS' performance measures will continue to
evolve as IRS continues to implement its organizational
modernization. Fiscal year 1999 represents a transition period
for IRS to introduce and baseline (gather and analyze data) the
new measurement system. Performance measures with "baseline"
noted in the fiscal year 1999 or fiscal year 2000 column indicate
that these are new IRS measures. As shown in both tables, IRS
plans to establish the baselines for most of its performance
measures in fiscal year 1999. Table III.1: Servicewide Performance
Measures With Performance Report Based on Fiscal Year 1998 Data FY
1998 FY 1999 FY 2000 Servicewide performance goal
Performance measure
Actual Final plan Proposed Service to each taxpayer Toll-
free level of access
89.96% 80-90% 80-90% Number of calls answered,
includes automated (million)a 113.3
120.3 120.3 Tax law accuracy rate for taxpayer inquiries
(toll free) 93.8% 85%
85% Customer satisfaction-toll free
b Baseline c Number of taxpayers served-walk-in
(millions) a 10.1
10.0 10.0 Customer satisfaction-walk-in
b Baseline c Customer satisfaction-field and
office examination b
Baseline c Field collection quality
b Baseline c Field and office examination quality
b Baseline c Customer satisfaction-field
collection b
Baseline c Service to all taxpayers Total net
revenue collected (billions) a
$1,616.0 $1,725.0 $1,785.0 Total enforcement revenue
collected (billions) a $35.2
$33.3 $33.3 Total enforcement revenue protected (billions)
a $7.2 $7.2
$7.2 Alternative treatment revenue
b Baseline c Productivity through a Employee
satisfaction (Servicewide)
b Baseline c quality work environment IRS
productivity measure (placeholder)
bb Baseline aWorkload projections only. bMeasure not applicable to
this period. cTo be determined. Source: IRS' Fiscal Year 2000
Congressional Justification. Page 30
GAO/T-GGD/AIMD-99-140 Appendix III Table 2: Program Performance
Measures with Performance Report Based on Fiscal Year 1998 Data FY
1998 FY 1999 FY 2000 Performance measure
Actual Final plan Proposed 1. Total number of individual
refunds issued (millions)a.
87.9 92.2 94.2 2. Refund timeliness-paper (%)
Baseline c 3. Refund timeliness-e-file(%)
98.7% 98% 98% 4. Processing accuracy rate-paper
filing Distributed Input System
94.6% 94.6% 94.6% Code and edit
96.1% 96% 96% 5. Processing accuracy rate-e-file
98.9% 99% 99% 6. Notice accuracy rate
98.4% 98.5% 98.5% 7. Number of individual returns
filed through electronic returns originators (millions) 17.7
20.9 22.9 8. Number of eligible quarterly forms (Form 941)
filed through TeleFile (thousands) 677.4 1,146.1
1,186.0 9. Number of TeleFile returns (millions)
5.96 6.6 7 7.8 10. Number of primary returns
processed (millions)a
209.8 211.9 213.9 11. Percent of individual returns
filed electronically 19.8%
23% 25% 12. Percent of dollars received electronically
67.7% 78% 78% 13. Automated Collection System
(ACS)-online accuracy
b Baseline c 14. ACS-Cycle timeliness
b Baseline c 15. ACS-Customer relations
b Baseline c 16. ACS-Overage inventory
b Baseline c 17. Tax law accuracy rate for
taxpayer inquires (toll free)
93.8% 85% 85% 18. Accounts accuracy rate for
taxpayer inquires
87.9% 87.9% 88.5% 19. Toll free timeliness
b Baseline c 20. Toll free customer relations (tax
law and accounts) b
Baseline c 21. Service Center examination-overage
inventory b
Baseline c 22. Service Center examination accuracy
b Baseline c 23. ACS level of service
b Baseline c 24. Toll free-level of service
b Baseline c 25. Toll free-adherence to scheduled
hours b
Baseline c 26. Service Center examination-volume/mix
(placeholder) bb b 27.
Customer satisfaction-toll free
b Baseline c 28. Customer satisfaction-ACS
b Baseline c 29. Customer satisfaction-Service
Center examination b
Baseline c 30. Employee satisfaction-toll free
b Baseline c 31. Employee satisfaction-ACS
b Baseline c 32. Employee satisfaction-Service
Center examination b
Baseline c 33. Taxpayer Advocate average processing
time (days) 37.8
37.8 37.8 34. Taxpayer Advocate quality customer service
rate 80.8 81.3
81.3 35. Currency of Taxpayer Advocate inventory (days)
91.3 91.8 91.8 36. Field and office examination-
volume/mix (placeholder) b
Baseline c 37. Field and office examination quality
b Baseline c 38. Percent of field and office
examination cases overage
b Baseline c 39. Customer satisfaction-
field/office examination
b Baseline c Page 31
GAO/T-GGD/AIMD-99-140 Appendix III FY 1998 FY 1999
FY 2000 Performance measure
Actual Final plan Proposed 40. Employee satisfaction-
field/office examination
b Baseline c 41. Appeals customer satisfaction
b Baseline c 42. Appeals employee satisfaction
b Baseline c 43. Appeals nondocketed cycle time
(days)
210 210 210 44. Field collection-volume/mix
b Baseline c 45. Field collection quality
b Baseline c 46. Percentage of field collection
cases overage
b Baseline c 47. Percentage of offers-in-
compromise processed within 6 months
60.5% 59.3% 59.3% 48. Customer satisfaction-
field collection
b Baseline c 49. Employee satisfaction-field
collection
b Baseline c 50. Employee Plans (EP) determination
letter timeliness (days)
118 145 c 51. Exempt Organizations (EO )
determination letter timeliness (days)
85 85 81 52. EP examination timeliness(days)
193 200 230 53. EO examination timeliness (days)
251 259 294 54. EO determination customer
satisfaction
b Baseline c 55. EP determination customer
satisfaction
b Baseline c 56. EO examination customers
satisfaction
b Baseline c 57. EP examination customer
satisfaction
b Baseline c 58. Employee satisfactionEP/EO
b Baseline c 59. Percent of Statistics of Income
projects delivered on time
100% 90% 90% 60. Quality customer service
rate
98% 90% 90% 61. Guidance and assistance-
volume/mix
b Baseline c 62. Litigation case-volume/mix
b Baseline c 63. Chief Counsel quality
bb Baseline 64. Chief Counsel customer satisfaction
bb Baseline 65. Chief Counsel employee satisfaction
bb Baseline 66. Master file weekend update completion times
66.0% 85.6% 97.0% 67. Corporate file on-line
availability to front line personnel
99.7% 99.0% 99.0% 68. Integrated Data Retrieval
System real time availability to front line personnel
99.4% 99.0% 99.0% aWorkload projections only.
bMeasure not applicable to this period. cTo be determined Source:
IRS' Fiscal Year 2000 Congressional Justification. Page 32
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