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Testimony:

Before the Subcommittee on Oversight, Committee on Ways and Means, 
House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 3 p.m. EDT:

Tuesday, March 30, 2004:

INTERNAL REVENUE SERVICE:

Assessment of Fiscal Year 2005 Budget Request and 2004 Filing Season 
Performance:

Statement of James R. White:

Director, Tax Issues:

Robert F. Dacey:

Director, Information Security Issues:

GAO-04-560T:

GAO Highlights:

Highlights of GAO-04-560T, a testimony before the Subcommittee on 
Oversight, Committee on Ways and Means, House of Representatives 

Why GAO Did This Study:

Effective tax administration requires a combination of quality customer 
service to help those who want to comply, and effective enforcement 
measures against those who do not. For the last few years, we have been 
reporting on improvements in taxpayer service and declines in 
enforcement. 

With respect to IRSís fiscal year 2005 budget request, the Subcommittee 
asked GAO to assess whether (1) IRS will be able to allocate more 
resources to enforcement, and (2) Business Systems Modernization (BSM) 
and other technology efforts will deliver cost savings and efficiencies 
in the immediate future. For the 2004 filing season performance, GAO 
was asked to assess IRSís performance in processing returns and 
providing assistance to taxpayers.

What GAO Found:

IRS is requesting $10.7 billion in fiscal year 2005, 4.8 percent over 
2004. This includes $377.3 million, primarily for additional 
enforcement staff, and $373 million for increased costs of maintaining 
current operationsófunded from three sourcesóthe budget increase, 
program reductions and internal savings. The request for more 
enforcement staff follows similar requests in IRSís past five budgets. 
Despite budget requests that were almost fully funded and despite 
realizing some savings in prior years, the number of most skilled 
enforcement staff declined by over 21 percent between 1998 and 2003 
because of other priorities, including unbudgeted expenses. This 
history, and the expectation of unbudgeted costs in 2005, raise 
questions about whether IRS will be able to increase enforcement staff 
as planned. 

IRSís request also includes about $1.93 billion in information 
technologyó $285 million for BSM contractor costs and about $1.64 
billion for information systems. Most BSM projects have experienced 
cost overruns and schedule delays postponing benefits expected under 
BSM. IRS reduced its BSM budget request to focus on fewer projects and 
is implementing plans to respond to known deficiencies. IRS has made 
progress in implementing investment management best practices for 
developing and supporting its information systems budget request. 
However, until IRS fully implements the improvements, its ability to 
develop supportable budget requests for information systems operations 
and maintenance will be limited. 

IRSís reported 2004 filing season performance in key areas improved, 
with the exception of the accuracy of tax law responses provided over 
the telephones to taxpayers, which declined. Also, the number of 
taxpayers seeking assistance at IRSís walk-in assistance sites declined 
as did the number of tax returns prepared at those sites. 

What GAO Recommends:

GAO is not making any recommendations. However, GAO has recommendations 
that are still outstanding related to (1) BSM management controls,
which have contributed, at least in part, to cost overruns and schedule 
shortfalls, and (2) IRSís budget justification for its information 
systems operations and maintenance support. 

www.gao.gov/cgi-bin/getrpt?GAO-04-560T.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Jim White (202) 512-9110 
or whitej@gao.gov.

[End of section]

Mr. Chairman and Members of the Subcommittee:

We are pleased to participate in the Subcommittee's hearing on the 
Internal Revenue Service's (IRS) fiscal year 2005 budget request and 
its performance to date during the 2004 tax filing season.

Effective tax administration requires a combination of quality taxpayer 
service to help those who want to comply, and effective enforcement 
measures against those who do not. Although tax administrators 
continually debate the proper balance between taxpayer service and 
enforcement, the ultimate goal is to assure a high level of voluntary 
compliance. Currently, about 98 percent of the money IRS collects is 
received voluntarily--without any IRS enforcement action.

For the last few years, we have been reporting on trends in taxpayer 
service and enforcement. During this period, IRS has noticeably 
improved the quality of service to taxpayers. At the same time, there 
have been declines in many of IRS's enforcement programs and in the 
numbers of the most skilled enforcement staff. Many inside and outside 
IRS have become concerned that the declines in enforcement efforts have 
reduced taxpayers' incentive to voluntarily comply with the tax laws. 
While the actual impact on voluntary compliance is unknown, because IRS 
does not have a reliable current estimate of the overall compliance 
rate, the fear is that taxpayers could lose confidence in IRS's ability 
to ensure that all taxpayers pay what they should. If taxpayers ever 
lose confidence that their friends, neighbors, and business competitors 
are paying their fair share of taxes, then they could become less 
willing to pay themselves.

One key to improving taxpayer service and enforcement is IRS's Business 
Systems Modernization (BSM) effort, now in its 6th year. If successful, 
BSM is expected to allow IRS to better serve taxpayers and enforce the 
tax laws without a major increase in staffing and other resources. 
However, we continue to report that modernization is a high-risk area, 
the scope and complexity of BSM is growing, and BSM projects are 
experiencing additional costs and delays.

As you requested, our statement discusses both IRS's 2005 budget 
request and its 2004 filing season performance to date. With respect to 
the budget, we assessed the likelihood that (1) IRS will be able to 
allocate more resources to enforcement, and (2) BSM and other 
technology efforts will deliver cost savings and efficiencies in the 
immediate future. With respect to the filing season, we assessed IRS's 
performance in processing returns and providing assistance to 
taxpayers.

Our assessment of the budget request and BSM is based on a comparative 
analysis of IRS's fiscal year 2002 through 2005 budget requests, 
funding, and expenditures, supporting documentation, and interviews 
with IRS officials. Our assessment of the filing season is based on a 
comparison of IRS's performance this year to the previous two filing 
seasons, site visits to an IRS processing center and walk-in sites, 
monitoring processing status meetings, interviews with IRS and Treasury 
Inspector General for Tax Administration (TIGTA) officials and other 
external stakeholders, reviews of TIGTA and other external reports, and 
reviews of IRS's Web site. We used historical budget and performance 
data including filing season performance data from reports and budget 
requests used by the IRS, Department of Treasury, and Office of 
Management and Budget (OMB). Although we have not verified the accuracy 
of the most recent data, in past reports we have assessed IRS's budget 
and performance data.[Footnote 1] As a result, we considered the data 
to be sufficiently reliable for purposes of this testimony. The budget 
and performance projections for fiscal years 2004 and 2005 are subject 
to change. Also, we did not independently validate planned BSM 
projects' cost estimates or confirm, through system and project 
management documentation, the validity of IRS-provided information on 
the projects' content and progress. We performed our work in 
Washington, D.C. and Atlanta, Ga. from December 2003 through March 
2004, in accordance with generally accepted government auditing 
standards.

In summary, our assessment of IRS's 2005 budget request shows that:

* IRS is requesting $10.7 billion, an increase of $489.8 million over 
fiscal year 2004. The 2005 budget proposes $377.3 million to fund new 
initiatives, primarily increases in enforcement staff, and $373 million 
to cover the increased costs, such as salary increases, of maintaining 
current programs. IRS plans to fund the additional spending from three 
sources--the budget increase, program reductions ($149.7 million) and 
internal savings ($110.8 million). IRS has made increasing enforcement 
staff a priority in its last five budget requests. However, despite 
getting its requests almost fully funded and despite realizing some 
savings--although not all that were projected--IRS did not achieve 
increases in enforcement staff. Staffing in three key enforcement 
occupations--revenue agents, revenue officers, and special agents--
declined by over 21 percent between 1998 and 2003. IRS funded other 
priorities such as unbudgeted expenses and improvements to taxpayer 
service. This raises several questions and concerns. One is whether IRS 
will be able to increase enforcement staff as planned in 2005. Another 
is whether the declines in enforcement staff, and the resulting 
declines in statistics related to IRS's enforcement programs, are 
eroding taxpayers' incentive to voluntarily comply with the tax laws.

* Included in IRS's budget request is about $1.93 billion (including 
7,385 staff years) in information technology resources. This includes 
(1) $285 million for the agency's multiyear capital account that funds 
contractor costs for the BSM program and (2) about $1.64 billion for 
information systems, of which $1.55 billion is for operations and 
maintenance. The BSM request has been developed consistent with federal 
guidance on budget preparation. While BSM management controls have 
improved, some weaknesses, such as cost and schedule estimating, still 
remain. Most BSM projects have experienced cost overruns and schedule 
delays that have postponed the delivery of benefits to taxpayers and 
IRS operations. In an effort to better ensure that projects are 
delivered within budget and on schedule, IRS has reduced its BSM budget 
request to focus on a smaller modernization project portfolio and is 
implementing action plans to respond to deficiencies noted in several 
recent assessments of the BSM program. In addition, with respect to its 
information systems budget request, IRS has made progress in 
implementing investment management best practices for developing and 
supporting it. However, until IRS fully implements planned process 
improvements, its ability to develop supportable information systems 
operations and maintenance budget requests will remain limited.

Our assessment of the 2004 filing season to date shows that:

* IRS's performance during the 2004 filing season has improved in most 
areas compared to this time last year and the year before, based on the 
data we reviewed on key filing season activities--paper and electronic 
processing, telephone assistance, IRS's Web site and walk-in 
assistance. In particular, access to IRS's telephone assistors has 
improved and Web site usage has increased. However, the accuracy of 
responses to tax law questions provided by telephone assistors declined 
the last two years. Additionally, the number of taxpayers seeking 
assistance at IRS's walk-in sites continued to decline and IRS is 
shifting work from its walk-in sites to alternative means of providing 
assistance, such as its volunteer organizations and its Web site. 
Although it cannot be quantified, the improvements overall in the 2004 
filing season performance appear to represent a payoff from IRS's 
modernization and increased emphasis on service since 1998.

Enhancing Enforcement Is A Key Priority But Devoting More Resources To 
Enforcement May Be Difficult:

The fiscal year 2005 budget is the fifth consecutive budget request 
where IRS is proposing increased staffing for enforcement and the third 
where it has identified internally-generated savings to help fund the 
increase. The 2005 budget proposes that, of the $377.3 million for new 
initiatives to be paid for either through new funding and reinvested 
savings, $315.2 million or 84 percent go to enforcement. In the past, 
IRS has not been able to realize all the projected savings intended to 
help fund enforcement staffing increases. In addition, other 
priorities, including unbudgeted expenses and taxpayer service, have 
consumed budget increases and internally-generated savings. This raises 
the question about IRS's ability to increase enforcement staffing as 
planned in 2005.

IRS is Asking For Significantly More For Enforcement in 2005:

IRS's fiscal year 2005 budget request is $10.7 billion, up $489.8 
million or 4.8 percent from the amount appropriated for fiscal year 
2004. IRS's request identifies a total of $750.3 million of new 
proposed spending--$377.3 million for new initiatives, primarily 
enforcement, and $373 million to maintain current operations (such as 
salary increases included in the budget). IRS plans to fund the 
additional spending from three sources--budget increases, program 
reductions, and internal savings. IRS is proposing to receive $489.8 
million in budget increases, gain $149.7 million from program 
reductions, primarily from reducing the amount for BSM, and save $110.8 
million from process improvements. For context about IRS's staff 
resources, we provide information about how IRS allocated those 
resources in fiscal year 2003 to various functions including returns 
processing, taxpayers service and enforcement in appendix I.

In its 2005 budget request, IRS makes increasing enforcement staffing 
its priority. IRS identified its priority enforcement areas as:

* promoters of tax schemes,

* misuses of offshore transactions,

* uses of corporate tax avoidance transactions,

* underreporting of income by higher income taxpayers, and:

* failures to file and pay large amounts of employment taxes.

IRS is proposing to spend $377.3 million on new initiatives; $315.2 
million, or 84 percent is slated for enforcement initiatives. The rest 
is for infrastructure projects to, for example, consolidate paper 
processing operations. The major enforcement initiatives include:

* $90.2 million and 874 Full Time Equivalents (FTEs) to target 
noncompliance by small business and self-employed taxpayers by hiring 
field examination and collection, automated collection and service 
center-based compliance staff;

* $65 million and 260 FTEs for additional criminal investigation 
resources to combat corporate fraud, increase tax enforcement, and 
enhance criminal investigation capabilities by hiring additional 
criminal investigators and special agents to focus on corporate 
financial fraud, general tax enforcement, improve forensic electronic 
evidence capabilities and increase special agent support staff;

* $36 million and 207 FTEs to combat corporate abusive tax shelters by 
devoting more resources to reviewing offshore transactions;

* $15.5 million and 175 FTEs to increase individual taxpayer compliance 
by focusing on the full spectrum of individual taxpayer noncompliance, 
including nonfilers, nonpayers of tax owed, and more tax assessments on 
underreported income; and:

* $15.1 million and 144 FTEs to combat diversions of charitable assets 
and stop abusive transactions in the tax-exempt area by focusing on 
terrorism funding and civil fraud by charities, and targeting tax 
avoidance strategies by charities.

IRS is proposing to spend $373 million to maintain current operations, 
which would cover increased costs of continuing current operations. The 
increased costs include $133 million for salary increases assumed in 
IRS's budget. IRS's 2005 budget assumes a federal salary increase of 
1.5 percent. If the actual federal salary increase is higher than 1.5 
percent, IRS will have to cover the unbudgeted portion of the increase.

For 2005, IRS has identified $110.8 million in savings to be generated 
from process and system improvements. Key savings initiatives include:

* $34.0 million and 408 FTEs from a reorganization of the information 
systems function that will consolidate three parallel organizations, 
and reduce staff, to improve operations and support to IRS customers;

* $15.7 million and 220 FTEs from consolidating insolvency and exam/
collection field support from over 80 to 5 or fewer locations;

* $14.9 million and 167 FTEs from the termination of transition 
employees who could not be placed when offices closed and jobs were 
shifted when IRS reorganized into business units; and:

* $5.1 million and 130 FTEs due to more electronic filing.

In addition to the savings, IRS has identified $149.7 million in 
program reductions to help fund its 2005 spending priorities. The 
reductions include $102.7 million due to reductions in the scope of 
certain BSM projects (discussed later in more detail) and $18 million 
in overhead reductions.

Recent History Suggests Increasing Enforcement Staffing May Be 
Difficult:

In its last five budget requests, IRS has asked for more enforcement 
staff, to be funded partly by budget increases and partly through 
internal savings. Despite budget requests that were almost fully funded 
and despite achieving some savings, the number of skilled enforcement 
staff actually declined. The budget increases and savings were consumed 
by other priorities including unbudgeted expenses.

IRS's Recent Budget Requests Were Almost Fully Funded, and Some Savings 
Were Achieved:

Table 1 shows that IRS has received almost 98 percent or more of its 
budget requests since fiscal year 2002.

Table 1: IRS's requested and approved budget for fiscal years 2002 
through 2005 (in millions):

Requested budget; 
Fiscal Year 2002 (Actual): $9,422; 
Fiscal Year 2003 (Actual): $9,916; 
Fiscal Year 2004 (Actual): $10,437; 
Fiscal Year 2005 (Requested): $10,674.

Budget approved; 
Fiscal Year 2002 (Actual): 9,437; 
Fiscal Year 2003 (Actual): 9,835; 
Fiscal Year 2004 (Actual): 10,185; 
Fiscal Year 2005 (Requested): [Empty].

Source: IRS data.

[End of table] 

Table 2 shows that in 2003 IRS realized about 34 percent of its 
anticipated budget savings and about 41 percent of its anticipated 
staff savings. In 2004, IRS officials believe they did a better job in 
both estimating and tracking the savings and estimate they will be able 
to reinvest 77 percent of the anticipated budget savings and 53 percent 
of the anticipated staff savings.[Footnote 2]

Table 2: IRS's reported actual and estimated savings and reinvestments 
for fiscal year 2003 and 2004 (In millions):

Savings[A]; Budgeted; 
Fiscal Year 2003: Dollars: 157.8; 
Fiscal Year 2003: Staff Levels: 2,287; 
Fiscal Year 2004: Dollars: 166.5; 
Fiscal Year 2004: Staff Levels: 2,145; 
Fiscal Year 2005 (est): Dollars: 110.8; 
Fiscal Year 2005 (est): Staff Levels: 1,442.

Savings[A]; Actual; 
Fiscal Year 2003: Dollars: 53.4; 
Fiscal Year 2003: Staff Levels: 944; 
Fiscal Year 2004: Dollars: 113.0; 
Fiscal Year 2004: Staff Levels: 1,120. 

Savings[A]; Percentage of actual [B]; 
Fiscal Year 2003: Dollars: 34%; 
Fiscal Year 2003: Staff Levels: 41%; 
Fiscal Year 2004: Dollars: 68%; 
Fiscal Year 2004: Staff Levels: 53%. 

Reinvestments[A]; Projected; 
Fiscal Year 2003: Dollars: 157.8; 
Fiscal Year 2003: Staff Levels: 1,830; 
Fiscal Year 2004: Dollars: 166.5; 
Fiscal Year 2004: Staff Levels: 649; 
Fiscal Year 2005 (est): Dollars: 110.8; 
Fiscal Year 2005 (est): Staff Levels: 712.

Reinvestments[A]; Actual; 
Fiscal Year 2003: Dollars: 47.4; 
Fiscal Year 2003: Staff Levels: 239; 
Fiscal Year 2004: Dollars: 99.5; 
Fiscal Year 2004: Staff Levels: 259.

Reinvestments[A]; Percentage of actual [B]; 
Fiscal Year 2003: Dollars: 30%; 
Fiscal Year 2003: Staff Levels: 13%; 
Fiscal Year 2004: Dollars: 77%; 
Fiscal Year 2004: Staff Levels: 53%.

Source: GAO analysis of IRS data.

[A] IRS considers savings to be gained through process or systems 
improvements and reinvestments to be those savings that were realized 
and available for other purposes.

[B] IRS reported actuals for 2003 and end of year projections for 2004.

[End of table]

IRS should be commended for identifying saving and reinvestment 
opportunities in its budget request. While IRS has been unable to 
achieve its savings targets, we recognize that budget preparation 
begins about 18 months before the beginning of the fiscal year, making 
it difficult to accurately predict future savings. IRS officials 
believe they are doing a better job both estimating and tracking 
savings. Nevertheless, IRS's history raises questions about its ability 
to achieve the 2005 savings targets.

IRS Has Been Unable to Achieve Increases In Enforcement Staffing in 
Recent Years:

Despite budget requests that were almost fully funded, and despite 
realizing some savings, IRS has been unable to achieve the enforcement 
staffing increases projected in its recent budgets.

As shown in figure 1, the number of revenue agents (those who audit 
complex returns), revenue officers, (those who do field collection 
work), and special agents (those who performed criminal investigations) 
has decreased over 21 percent between 1998 and 2003.

Figure 1: Revenue agents, revenue officers, and special agents, fiscal 
years 1998 - 2003:

[See PDF for image]

[End of figure]

The Large-and Mid-size Business (LMSB) operating division, responsible 
for combating abusive corporate tax shelters and assuring that large 
businesses are in compliance with the tax laws, is an example of these 
staffing trends. According to LMSB officials, at the beginning of 
fiscal year 2002, they had 5,047 revenue agents on board. This was 
reduced to 4,431 at the beginning of fiscal year 2004--a 12 percent 
reduction--due to attrition and the inability to hire.

The declines in enforcement staff have been associated with declines in 
enforcement efforts. For example, audit rates are below the levels of 
the mid-1990s, even after accounting for recent increases. Figure 2 
shows the trend in total audits of individual taxpayers since 1993. 
Total audits includes both face-to-face audits and less complex 
correspondence audits. IRS and GAO have reported[Footnote 3] that IRS 
has experienced steep declines in audit rates since 1996, although the 
audit rate has slowly increased since 2000.

Figure 2: Audit rate individual income tax returns, fiscal year 1993 - 
2003:

[See PDF for image]

[End of figure]

The link between the decline in enforcement staff and the decline in 
enforcement actions, such as audit rates, is complicated by other 
factors, such as changes over time in the mix of complex and simple 
enforcement actions. However, IRS officials have stated that the 
decline in enforcement staff has restricted their enforcement efforts. 
For example, LMSB officials stated that they hired about 200 fewer 
revenue agents than planned in fiscal year 2003 and expect to hire 
about 95 fewer in fiscal year 2004 because of budget constraints. They 
estimated that had this hiring occurred as planned, LMSB could have 
examined an additional 505 returns and 1,877 returns in fiscal years 
2003 and 2004 respectively. In addition, the 2005 budget request 
attributes the decline in enforcement actions to the decline in 
enforcement staff.

The impact of the recent declines in enforcement staffing and 
enforcement actions on taxpayers' rate of voluntary compliance is not 
known. This leaves open the question of whether these declines are 
eroding taxpayers' incentives to voluntarily comply. As we have 
reported,[Footnote 4] the IRS's National Research Program (NRP), which 
is developing new estimates of taxpayer compliance, is underway. These 
estimates will be the first based on data more recent than 1988, when 
IRS last measured voluntary compliance. According to IRS officials the 
new estimates should be available in 2005. Until the NRP estimates are 
available, IRS lacks current data on compliance including changes in 
taxpayers' compliance rate.

NRP is important for several reasons beyond measuring compliance. It is 
intended to help IRS better target its enforcement actions, such as 
audits, on non-compliant taxpayers, and minimize audits of compliant 
taxpayers. It could also help IRS better understand the impact of 
taxpayer service on compliance.

Other IRS Priorities Have Consumed Recent Budget Increases and Savings:

Priorities other than enforcement, including unbudgeted expenses and 
taxpayer service, have consumed IRS's budget increases and savings over 
the last few years. Unbudgeted expenses include unfunded portions of 
the annual pay increases, that can be substantial given IRS's large 
workforce, and other costs, such as postage increases and higher-than-
budgeted rent increases. According to IRS officials, these unbudgeted 
expenses accounted for:

* $154 million of IRS's budget in 2002;

* $311 million of IRS's budget in 2003; and:

* $169 million of IRS's budget in 2004.

IRS officials also told us that they anticipate having to cover 
unbudgeted expenses in 2005. As of March 2004, they were projecting 
unbudgeted salary increases for fiscal year 2005 of at least $100 
million. This projection could change since the actual federal salary 
increase for 2005 has not been finalized.

Another reason for the reduction in enforcement staff has been IRS's 
emphasis on improving service to taxpayers. According to IRS officials, 
much of this improvement has been at the expense of additional 
resources for enforcement and has resulted in less hiring of new staff 
for enforcement activities.

IRS's Information Technology Budget Includes Funding For BSM and 
Information Systems:

IRS is requesting about $1.93 billion (including 7,385 staff years) in 
information technology (IT) resources for fiscal year 2005. This 
includes (1) $285 million for the agency's multiyear capital account 
that funds contractor costs for the Business Systems Modernization 
(BSM) program and (2) about $1.64 billion for information systems, of 
which $1.55 billion (including 7,137 staff years) are for operations 
and maintenance. BSM is important for IRS's future because it has the 
potential for long-term efficiency gains without major increases in 
staffing or other resources.

Fiscal Year 2005 BSM Request Developed Consistent with Federal 
Guidance:

Consistent with the Clinger-Cohen Act of 1996[Footnote 5] and the 
Government Performance and Results Act of 1993,[Footnote 6] OMB 
guidance on budget preparation and submission[Footnote 7] require that, 
before requesting multiyear funding for capital asset acquisitions, 
agencies develop sufficient justification for these investments. The 
guidance requires that agencies implement key IT management practices, 
including an integrated IT architecture and a process for managing 
information systems projects as investments. In addition, agencies are 
to prepare business cases that reasonably demonstrate how proposed 
investments support agency missions and operations, and provide 
positive business value in terms of expected costs, benefits, and 
risks.

Beginning in 1995, when IRS was involved in an earlier attempt to 
modernize its tax processing systems, and continuing since then, we 
have made recommendations[Footnote 8] that IRS implement fundamental 
modernization management capabilities before acquiring new systems. We 
recommended, among other things, that IRS (1) put in place an 
enterprise architecture[Footnote 9] (modernization blueprint) to guide 
and constrain its business system investments, and (2) implement 
disciplined processes for investment decision management and system 
development management.

In response to our recommendations, IRS developed and is using an 
enterprise architecture, which describes IRS's current and target 
business and technology environments, and the associated high-level 
transition strategy that identifies and conceptually justifies needed 
investments to guide the agency's transition over many years from its 
current to its target architectural state. In addition, IRS also 
implemented a capital planning and investment control process for 
developing business cases and managing BSM projects as part of an 
investment portfolio, as well as a systems life cycle management 
methodology, which IRS refers to as the enterprise life cycle.

IRS's $285 million request for the BSM account for fiscal year 2005 is 
based on its enterprise architecture as well as its related investment 
management process and life cycle management methodology. IRS's BSM 
budget request constitutes a reduction of greater than 25 percent from 
the planned fiscal year 2004 spending level of $388 million, and 
reflects the agency's decision, in light of ongoing project delays, to 
focus on a smaller modernization project portfolio in an effort to 
better ensure cost targets are maintained, project schedules are met, 
and the promised projects are delivered.

BSM Management Controls Improved, But Weaknesses Remain:

Pursuant to statute,[Footnote 10] funds from the BSM account are not 
available for obligation until IRS submits to the congressional 
appropriations committees for approval an expenditure plan that meets 
certain conditions.[Footnote 11] In January 2004, IRS submitted an 
expenditure plan seeking approval to obligate funds from the BSM 
account for its planned fiscal year 2004 projects and program-level 
initiatives. IRS's fiscal year 2004 plan reported the deployment of 
modernization projects during fiscal year 2003 that have benefited 
taxpayers and the agency, including an application that provides refund 
status for the advanced child tax credit and the first release of a new 
human resources system, HR Connect, which has now been delivered to 
73,000 IRS employees.

In our briefing to the staff of the relevant appropriations 
subcommittees on the results of our review of the fiscal year 2004 
expenditure plan, we reported that IRS has made progress in 
implementing our prior recommendations to improve its modernization 
management controls and capabilities. However, certain of these 
controls and capabilities related to configuration management, human 
capital management, cost and schedule estimating, and contract 
management have not yet been fully implemented or institutionalized. 
Our analysis has shown that weaknesses in these controls and 
capabilities have contributed, at least in part, to cost and schedule 
shortfalls experienced by most BSM projects. In the absence of 
appropriate management controls, systems modernization projects will 
likely be hampered by additional costs and schedule shortfalls. The 
reasons are twofold: the tasks associated with those projects that are 
moving beyond design and into development are, by their nature, more 
complex and risky. Also, the fiscal year 2004 expenditure plan supports 
progress toward the later, more complex phases of key projects as well 
as continued development of other projects.

BSM Projects Continue to Incur Cost Increases and Schedule Delays:

Based on IRS's expenditure plans, BSM projects have consistently cost 
more and taken longer to complete than originally estimated. In its 
fiscal year 2004 plan, IRS disclosed that key BSM projects have 
continued to experience cost and schedule shortfalls against prior 
commitments. Table 3 shows the life cycle variance in cost and schedule 
estimates for completed and ongoing BSM projects. These variances are 
based on a comparison of IRS's initial and revised cost and schedule 
estimates to complete initial operation[Footnote 12] or full 
deployment[Footnote 13] of the projects. We did not independently 
validate planned projects' cost estimates or confirm, through system 
and project management documentation, the validity of IRS-provided 
information on the projects' content and progress.

Table 3: IRS BSM project life cycle cost/schedule variance and benefits 
summary for completed and on-going projects:

Project; Completed Projects: Security and Technology Infrastructure 
Release 1; 
Cost variance (in thousands): +$7,553; 
Reported/revised estimated cost (in thousands): $41,287; 
Schedule variance (in months): +5; 
Reported/ revised estimated completion date: 1/31/02 (initial 
operation); 
Reported IRS/taxpayer benefits: Provides infrastructure for secure 
telephony and electronic interaction among IRS employees, tax 
practitioners, and taxpayers.

Project; Completed Projects: Customer Communications 2001; 
Cost variance (in thousands): +5,310; 
Reported/revised estimated cost (in thousands): 46,420; 
Schedule variance (in months): +9; 
Reported/revised estimated completion date: 2/26/02 (full deployment); 
Reported IRS/taxpayer benefits: Improves telecommunications 
infrastructure, including telephone call management, call routing, and 
customer self-service applications.

Project; Completed Projects: Customer Relationship Management Exam; 
Cost variance (in thousands): -1,938; 
Reported/revised estimated cost (in thousands): 7,375; 
Schedule variance (in months): +3; 
Reported/revised estimated completion date: 9/30/02 (full deployment); 
Reported IRS/taxpayer benefits: Provides commercial-off-the-shelf 
software to IRS revenue agents to allow them to accurately compute 
complex corporate transactions.

Project; Completed Projects: Human Resources Connect Release 1; 
Cost variance (in thousands): +200; 
Reported/revised estimated cost (in thousands): 10,200; 
Schedule variance (in months): 0; 
Reported/revised estimated completion date: 12/31/02 (initial 
operation); 
Reported IRS/taxpayer benefits: Allows IRS employees to access and 
manage their human resources information online.

Project; Completed Projects: Internet Refund/ Fact of Filing; 
Cost variance (in thousands): +12,923; 
Reported/revised estimated cost (in thousands): 26,432; 
Schedule variance (in months): +14; 
Reported/revised estimated completion date: 9/26/03 (full deployment); 
Reported IRS/taxpayer benefits: Provides instant refund status 
information and instructions for resolving refund problems to taxpayers 
with Internet access.

Project; Ongoing Projects[A]: Modernized e-File Release 1; 
Cost variance (in thousands): +17,057; 
Reported/revised estimated cost (in thousands): 46,303; 
Schedule variance (in months): +4.5; 
Reported/revised estimated completion date: 3/31/04[B] (initial 
operation); 
Reported IRS/ taxpayer benefits: Provides a single standard for filing 
electronic tax returns.

Project; Ongoing Projects[A]: e-Services; 
Cost variance (in thousands): +86,236; 
Reported/ revised estimated cost (in thousands): 130,281; 
Schedule variance (in months): +18; 
Reported/revised estimated completion date: 4/30/05 (full deployment); 
Reported IRS/taxpayer benefits: Provides a Web portal and other 
e-Services to promote the goal of conducting most IRS transactions with 
taxpayers and tax practitioners electronically.

Project; Ongoing Projects[A]: Customer Account Data Engine - Individual 
Master File Release 1; 
Cost variance (in thousands): +36,760; 
Reported/revised estimated cost (in thousands): 97,905; 
Schedule variance (in months): +30[C]; 
Reported/revised estimated completion date: 6/30/05[C](full 
deployment); 
Reported IRS/taxpayer benefits: Provides the modernized database 
foundation to eventually replace the existing individual master file 
processing systems. Facilitates faster refund processing and more 
timely response to taxpayer inquiries for Form 1040EZ filers.

Project; Ongoing Projects[A]: Integrated Financial System Release 1; 
Cost variance (in thousands): +53,916; 
Reported/revised estimated cost (in thousands): 153,786; 
Schedule variance (in months): TBD[C]; 
Reported/revised estimated completion date: TBD[C](full deployment); 
Reported IRS/ taxpayer benefits: Provides a single general ledger for 
custodial and financial data and a platform to integrate core financial 
data with budget, performance, and cost accounting data.

Project; Ongoing Projects[A]: Custodial Accounting Project Release 1; 
Cost variance (in thousands): +72,058; 
Reported/revised estimated cost (in thousands): 119,219; 
Schedule variance (in months): TBD[C]; 
Reported/revised estimated completion date: TBD[C](full deployment); 
Reported IRS/ taxpayer benefits: Provides integrated tax operations and 
internal management information to support evolving decision analytics,
performance measurement, and management information needs. 

Source: GAO analysis of data contained in IRS's BSM expenditure plans.

[A] Projects ongoing as of 9/30/03.

[B] IRS subsequently reported that Modernized e-File began initial 
operation on 2/23/04.

[C] Project schedules for the Customer Account Data Engine, the 
Integrated Financial System, and the Custodial Accounting Project are 
currently under review.

[End of table]

As the table indicates, the cost and schedule estimates for full 
deployment of the e-Services project have increased by just over $86 
million and 18 months, respectively, which included a significant 
expansion from the initial project scope. In addition, the estimated 
cost for the full deployment of Customer Account Data Engine (CADE) 
Release 1 has increased by almost $37 million, and project completion 
has been delayed by 30 months. In addition to the modernization 
management control shortcomings discussed above, our work has shown 
that the increases and delays were caused, in part, by:

* inadequate definitions of systems requirements. As a result, 
additional requirements have been incorporated into ongoing projects.

* increases in project scope. For example, the e-Services project has 
changed significantly since the original design. The scope was 
broadened by IRS to provide additional benefits to internal and 
external customers.

* underestimating project complexity. This factor has contributed 
directly to the significant delays in the CADE release 1 schedule.

* competing demands of projects for test facilities. Testing 
infrastructure capacity is insufficient to accommodate multiple 
projects when testing schedules overlap.

* project interdependencies. Delays with one project have had a 
cascading effect and have caused delays in related projects.

These cost overruns and schedule delays impair IRS's ability to make 
appropriate decisions about investing in new projects, delay delivery 
of benefits to taxpayers, and postpone resolution of material 
weaknesses affecting other program areas.

Producing reliable estimates of expected costs and schedules is 
essential to determining a project's cost-effectiveness. In addition, 
it is critical for budgeting, management, and oversight. Without this 
information, the likelihood of poor investment decisions is increased.

Schedule slippages delay the provision of modernized systems' direct 
benefits to the public. For example, as table 4 shows, slippages in 
CADE will delay IRS's ability to provide faster refunds and respond to 
taxpayer inquiries on a timely basis.

Delays in the delivery of modernized systems also affect the 
remediation of material internal management weaknesses. For example, 
the Custodial Accounting Project is intended to address a material 
weakness in IRS's financial reporting process and provide a mechanism 
for tracking and summarizing individual taxpayer transactions. This 
release has yet to be implemented, and a revised schedule has not yet 
been determined. In addition, the Integrated Financial System is 
intended to address financial management reporting weaknesses. When IRS 
submitted its fiscal year 2003 BSM expenditure plan, Release 1 of the 
Integrated Financial System was scheduled for delivery on October 1, 
2003. However, it has yet to be implemented, and additional cost 
increases are expected.

IRS Is Acting to Resolve Issues Identified in Recent BSM Assessments:

Given the continued cost overruns and schedule delays experienced by 
these BSM projects, IRS and the prime systems integration support 
(PRIME) contractor, Computer Sciences Corporation (CSC), initiated and 
recently completed several in-depth and more comprehensive assessments 
of BSM. These assessments revealed several significant weaknesses that 
have driven project cost overruns and schedule delays and also provided 
a number of recommendations for IRS and CSC to address the identified 
weaknesses and reduce the risk to BSM. The deficiencies identified are 
consistent with our prior findings. IRS developed a BSM action plan to 
address the findings and recommendations resulting from these 
assessments. IRS expects to complete implementation of its actions by 
the end of the calendar year. Because of the significant risks 
associated with the findings of these various assessments, continued 
monitoring by IRS and validation of the effectiveness of corrective 
actions is critical to reducing the likelihood of additional cost 
overruns and schedule delays.

It will be important for IRS to continue its efforts to balance the 
scope and pace of the program with the agency's capacity to handle the 
workload, and to institutionalize the management processes and controls 
necessary to resolve the deficiencies identified by our reviews and the 
recent program assessments. Meeting these challenges and improving 
performance are essential if IRS and the PRIME contractor are to 
successfully deliver the BSM program.

Continued Efforts Needed to Strengthen Information Systems Budget 
Request Development Process:

The Paperwork Reduction Act (PRA)[Footnote 14] requires federal 
agencies to be accountable for their IT investments and responsible for 
maximizing the value and managing the risks of their major information 
systems initiatives. The Clinger-Cohen Act of 1996[Footnote 15] 
establishes a more definitive framework for implementing the PRA's 
requirements for IT investment management. It requires federal agencies 
to focus more on the results they have achieved and introduces more 
rigor and structure into how agencies are to select and manage IT 
projects.

Leading private-and public-sector organizations have taken a project-or 
system-centric approach to managing not only new investments but also 
operations and maintenance of existing systems. As such, these 
organizations:

* identify operations and maintenance projects and systems for 
inclusion in budget requests;

* assess these projects or systems on the basis of expected costs, 
benefits and risks to the organization;

* analyze these projects as a portfolio of competing funding options; 
and:

* use this information to develop and support budget requests.

This focus on projects, their outcomes, and risks as the basic elements 
of analysis and decision-making is incorporated in the IT investment 
management approach that is recommended by OMB and GAO.[Footnote 16] By 
using these proven investment management approaches for budget 
formulation, agencies have a systematic method, on the basis of risk 
and return on investment, to justify what are typically very 
substantial information systems operations and maintenance budget 
requests.

In our assessment of IRS's fiscal year 2003 budget request, we reported 
that the agency did not develop its information systems operations and 
maintenance request in accordance with the investment management 
approach used by leading organizations. We recommended that IRS prepare 
its future budget requests in accordance with these best 
practices.[Footnote 17] To address our recommendation, IRS agreed to 
take the following actions:

* develop an activity-based cost model to plan, project, and report 
costs for business tasks/activities funded by the information systems 
budget;

* develop a capital planning guide to implement processes for capital 
planning and investment control, budget formulation and execution, 
business case development, and project prioritization; and:

* implement a process for managing all information systems investments 
as a portfolio, patterned after the BSM program.

IRS has made progress in implementing investment management best 
practices in developing and supporting its information systems budget 
request. IRS officials reported that the agency is managing all 
information systems funding requirements as a portfolio within 
Treasury's IT investment portfolio system, and preparing business cases 
for many of its operational program activities, as required by OMB. 
According to IRS, these business cases are updated on a periodic basis 
and are evaluated within the context of the agency's overall IT funding 
portfolio. IRS plans to align this portfolio management process with 
the capital planning and investment control system now being 
implemented to provide a uniform process to select, manage, and control 
all IT investments, including modernization, enhancements, and 
sustaining operations.

Although progress has been made, IRS has not yet completed all of its 
planned actions to implement our prior recommendation. Completion of 
IRS's capital planning and investment control guide has been delayed 
due to changing roles and responsibilities within the Modernization and 
Information Technology Services organization, and thus was not used in 
preparing the fiscal year 2005 information systems budget request. 
According to IRS, the capital planning guidance will not be completed 
until September 2004. In addition, as of March 2004, IRS has not yet 
developed an activity-based cost accounting system to enable it to 
account for the full cost of operations and maintenance projects and 
determine how effectively IRS projects are achieving program goals and 
mission needs. This cost model, which is being developed in conjunction 
with the Integrated Financial System modernization project, has been 
delayed, and due to Integrated Financial System schedule delays, will 
not be available until the fiscal year 2008 budget formulation cycle. 
Until IRS implements the capital planning and investment control 
guidance and the activity-based cost model and incorporates them into 
the preparation of its information systems budget request, the agency 
will not be able to ensure that the information systems operations and 
maintenance request is adequately supported.

Interim Results Of IRS's 2004 Filing Season Show Improvement Except In 
Telephone Accuracy:

IRS's filing season performance through mid-March has improved in most 
areas compared to recent years, based on data we reviewed on five key 
filing season activities--paper and electronic processing, telephone 
assistance, IRS's Web site, and walk-in assistance. However, the 
accuracy of tax law answers provided by IRS telephone staff declined. 
Although we cannot quantify the connection between these improvements 
and IRS's actions, they appear to represent a payoff from IRS's 
modernization and an increased emphasis on service since the IRS 
Restructuring and Reform Act of 1998.[Footnote 18]

Table 4 summarizes IRS's filing season performance so far this year 
compared to recent years. The following sections will address IRS's 
specific performance in key areas.

Table 4: IRS performance in the first weeks of the 2002 through 2004 
filing seasons:

Volume in thousands: 

Actual returns processed [A]: Paper; 
2002: 24,491; 
2003: 22,117; 
2004: 20,232.

Actual returns processed [A]: Electronic; 
2002: 35,067; 
2003: 38,627; 
2004: 42,988.

Telephone assistance: Total calls [B]; 
2002: 34,489; 
2003: 27,905; 
2004: 29,058.

Telephone assistance: Total calls [B]: Answered by assistors; 
2002: 9,208; 
2003: 9,434; 
2004: 10,116.

Telephone assistance: Total calls [B]: Answered by automation; 
2002: 25,281; 
2003: 18,471; 
2004: 18,942.

Telephone assistance: Total calls [B]: Customer service representative 
level of service; 
2002: 62%; 
2003: 82%; 
2004: 84%.

Telephone assistance: Accounts customer accuracy rate estimates [C]; 
2002: 88% +/-1%; 
2003: 88% +/-1%; 
2004: 89% +/-1%.

Telephone assistance: Tax law customer accuracy rate estimates [C]; 
2002: 84% +/-1%; 
2003: 81% +/-1%; 
2004: 76% +/-1%.

Internet assistance: Forms and publications downloaded [D]; 
2002: 158,000; 
2003: 195,000; 
2004: 205,000.

Internet assistance: Refund status inquiries [E]; 
2002: N/A; 
2003: 9,300; 
2004: 14,300.

Internet assistance: Child Tax Credit inquiries [F]; 
2002: N/A; 
2003: N/A; 
2004: 8,500.

Walk-in assistance: Total Walk-in Contacts [G]; 
2002: N/A; 
2003: 2,740; 
2004: 2,433.

Walk-in assistance: Returns prepared at IRS walk-in sites [H]; 
2002: 436; 
2003: 291; 
2004: 186.

Walk-in assistance: Returns prepared at volunteer sites [J]; 
2002: 466; 
2003: 594; 
2004: 737. 

Source: IRS Data.

[A] From January 1 to March 22, 2002, January 1 to March 21, 2003, and 
January 1 to March 19, 2004.

[B] Total calls, calls answered by assistors and automation, and CSR 
level of service are based on actual counts from January 1 to March 16, 
2002, January 1 to March 15, 2003, and January 1 to March 13, 2004. 
2002 totals include increased call demand as a result of the Economic 
Growth and Tax Relief and Reconciliation Act of 2001 (P.L.107-16). 
Employer Identification Number data has been added to 2002 and 2003 to 
ensure valid data comparisons can be made to 2004 which includes 
Employer Identification Numbers.

[C] Based on a representative sample estimated at the 90 percent 
confidence level from January to February 2002, 2003 and 2004.

[D] From January 1 to February 28, 2002, January 1 to February 28, 
2003, and January 1 to February 29, 2004.

[E] From January 1 to March 20, 2003, and January 1 to March 20, 2004.

[F] From January 1 to March 21, 2004.

[G] From January 1 to March 15, 2003, and January 1 to March 13, 2004.

[H] From January 1 to March 16, 2002, January 1 to March 15, 2003, and 
January 1 to March 13, 2004.

[I] From January 1 to March 9, 2002, January 1 to March 8, 2003, and 
January 1 to March 6, 2004.

[End of table]

IRS's Processing Operations Have Gone Smoothly, and Electronic Filing 
Continues to Grow, But Not at Rate to Meet 2007 Goal:

According to IRS officials, tax industry representatives and data 
reviewed, the 2004 filing season is progressing smoothly (meaning 
without disruptions in IRS computer systems used in processing that 
would have a negative impact on taxpayers) and IRS is either meeting or 
exceeding its goals for the number of days to process an individual 
income tax returns, depending on the type of return. As table 5 shows, 
through March 19, 2004, IRS has processed about 63 million individual 
tax returns--of which 43 million were received electronically, which is 
about 4.4 million more electronically filed returns than this time last 
year. IRS officials have attributed this year's performance, in part, 
to having planned appropriately for issues such as correcting errors 
related to the advanced child tax credit. Through March 12, 2004, IRS 
had identified about 2.7 million individual tax returns with errors, 
with approximately 1.6 million related to the advanced child tax 
credit.[Footnote 19]

Electronic filing has grown from the same time last year. It has also 
grown by about 250 percent overall--from about 15 million returns in 
1996 to about 53 million in 2003. Although electronic filing continues 
to grow, IRS is not on track to reach the long-term electronic filing 
goal of 80 percent by 2007 set by Congress in the IRS Restructuring and 
Reform Act of 1998.[Footnote 20] IRS officials recognize that they will 
not achieve the goal of having 80 percent of all individual income tax 
returns filed electronically by 2007. However, IRS officials told us 
they will continue to strive to achieve that goal in the future. 
Moreover, as we reported last year[Footnote 21], the growth rate from 
1996 through 2003 has been generally decreasing, with the 13 percent 
growth rate in 2003 representing the smallest percentage increase in 
the number of individual tax returns filed electronically since 
1996.[Footnote 22] Although the current growth rate is about 11 
percent, according to IRS data, the number of electronic filings is 
ahead of estimates at this time. Consequently, IRS officials believe 
IRS will meet and might exceed the annual growth rate goal of 12 
percent by the year's end.

Figure 3: Growth rate in the number of individual income tax returns 
filed electronically 1996 - 2004:

[See PDF for image]

Note: For 2004, the growth rate compares to the number of returns filed 
electronically as of March 12, 2004 to the same period in 2003.

[End of figure]

Growth in electronic filing remains a key part of IRS's modernization 
strategy. Electronic filing has allowed IRS to reduce resources devoted 
to processing (discussed in appendix I) and begin consolidating paper 
processing centers. It also reduces errors because IRS would not have 
to transcribe tax returns information and some up-front checks are 
built into electronic filing. Finally, taxpayers get refunds quicker 
with electronic filing--IRS's goal for refunds for electronically filed 
returns is about half the 40 days that IRS allows for refunds for 
returns filed on paper.

IRS has implemented numerous initiatives over the years intended to 
increase electronic filing usage. IRS's new major electronic filing 
initiatives this year are related to business not individual income tax 
returns. They are modernized E-File, which allows the electronic filing 
of corporate income tax form 1120 and E-Services, which is a suite of 
Internet services offered to tax practitioners such as electronic 
account resolution and transcript delivery. IRS officials do not expect 
these initiatives to dramatically increase electronic filing of 
individual tax returns this year, because taxpayers and practitioners 
will need to adjust their behavior and take advantage of the new 
services. However, these initiatives are important, because they should 
increase the willingness of tax practitioners to file both corporate 
and individual tax returns electronically in future filing seasons, 
which can currently be done only on a limited basis for corporate 
returns.

IRS made some changes to improve the Free File Alliance[Footnote 23] 
program, which began last year to promote electronic filing of 
individual income tax returns. As of March 7, 2004, IRS had received 
almost 2.5 million free file tax returns compared to 2.0 million for 
the same time last year--an increase of 24 percent. One issue with the 
Free File program is that IRS cannot determine how many of the Free 
File users are new electronic filers. We plan to follow up on this 
issue as part of our annual filing season report.

Telephone Access Improved Over Last Two Years, While Tax Law Accuracy 
Declined:

Access to IRS's toll-free telephone lines has improved over the last 
two years, although account accuracy (the accuracy of answers to 
questions from taxpayers about the status of their accounts) has 
stabilized and tax law accuracy declined. As table 5 shows, as of March 
13, 2004, IRS had received 29 million telephone calls. The percentage 
of taxpayers that attempted to reach an assistor and actually got 
through and received service--referred to as the Customer Service 
Representative (CSR) level of service--increased to 84 percent, which 
is 2 percentage points over the same period last year and 22 percentage 
points over the same period in 2002. According to IRS officials, the 
gains in CSR level of service are largely due to continued improvements 
resulting from increased specialization, improved technology, and 
continued focus on maintaining telephone staffing.

IRS estimates that accounts accuracy is essentially the same this year 
as for the last two years at this time. As shown in table 5, taxpayers 
who called about their accounts received correct information an 
estimated 89 percent of the time in 2004. IRS officials said that 
accounts accuracy rates remained stable, because the accounts workload 
has remained relatively stable.

At the same time, table 5 shows that IRS estimates that tax law 
accuracy declined from 84 percent in 2002 and 82 percent last year to 
76 percent so this year. IRS officials said that tax law accuracy rates 
declined because formatting changes made in 2003 to the guide CSRs use 
to help them answer questions have not enhanced the usability as IRS 
anticipated. According to IRS, although training was provided to the 
staff for the changes to their assigned subjects, IRS underestimated 
the impact these changes would have on overall quality. Also, IRS 
officials said they have begun redesigning the CSRs' guide and are 
continuing to conduct detailed analysis of quality data to identify 
immediate opportunities to improve the accuracy of service.

Web Site Usage is Increasing, But Concerns About Usability Still Exist:

IRS's Web site use has increased over the last 2 years as shown in 
table 6. Also, an independent Web site rater reported that, for 7 of 
out 10 weeks of the filing season, IRS's Web Site has ranked in the top 
10 out of 40 in a government Web site index for time it took to 
download information.

Over the last 2 years, IRS has added two features to assist taxpayers, 
which likely contributed to the increased usage of the IRS Web site. In 
fiscal year 2003, IRS added the "Where's My Refund?" and in 2004 added 
"Remember Your Advanced Child Tax Credit" features. The "Where's My 
Refund?" feature enables taxpayers to access IRS's Web site to 
determine if IRS received their tax return, whether their refund was 
processed, and if processed, when approximately to expect the refund. 
Table 5 shows that as of March 20, 2004, the use of this feature was up 
by 53 percent from last year, from about 9.3 million attempts to about 
14.3 million. The "Remember Your Advanced Child Tax Credit" enables a 
person to access IRS's Web site to determine the amount of the advanced 
child tax credit they received. As of March 21, 2004, about 8.5 million 
accesses have been made to the "Remember Your Child Tax Credit" 
feature.

Overall we found that IRS's Web site continues to improve when it comes 
to providing services to taxpayers. However, we continue to have 
concerns about the forms and publication search function. We found that 
the forms and publication search function still does not always make 
the most pertinent information readily available. For example, when we 
typed, "earned income tax credit" into the forms and publication search 
function, Publication 596--the primary publication on the earned income 
tax credit--was the 79th item on the list and we had to scroll through 
eight pages to find it.

Use of IRS's Walk-in Assistance Sites Continues to Decline:

The number of taxpayers receiving assistance at IRS walk-in sites 
continued to decline. At any one of IRS's over 400 walk-in sites, 
taxpayers get various types of assistance, including answers to tax law 
questions, assistance with their accounts, and return preparation 
assistance (generally for low income taxpayers).

The number of people who received assistance at an IRS walk-in site 
declined by 11 percent compared to the same period last year. IRS 
continues to restrict free tax preparation services to, for example, 
taxpayers with an annual gross income level of $35,000 or less, because 
of the labor intensive nature of that work and to enable staff to 
concentrate on other services that only IRS can provide such as account 
assistance. IRS reduced the number of staff available for return 
preparation by 20 percent from 2003. As the data in table 5 indicate, 
the number of returns being prepared has decreased by about 36 percent 
over this time last year. These trends are consistent with ones we have 
previously reported for recent filing seasons.[Footnote 24]

Figure 4 shows a downward trend in the overall assistance provided and 
in the return preparation at the walk-in sites.

Figure 4: Assistance provided by IRS walk-in and volunteer sites, 2000-
2003 filing seasons:

[See PDF for image]

Notes: Total walk-in figures shows all IRS face-to-face assistance, 
including return preparation, account services, and tax law assistance. 
It does not include the number of taxpayers assisted by walk-in 
employees via telephone or correspondence, which ranged from about 
96,000 in 2000 to over 150,000 in 2003. Total figures do not include 
returns prepared at volunteer sites.

The number of returns prepared at volunteer sites was not available for 
the 2000 filing season.

The time periods covered by this figure each began on January 1 and 
ended on April 22, 2000; April 21, 2001; April 20, 2002; and April 19, 
2003.

[End of figure]

Sites staffed by volunteers certified by IRS do not provide the range 
of services IRS provides, such as account assistance, and operate 
primarily during the filing season. IRS is promoting these as 
alternatives to its walk-in assistance sites for certain types of 
service. IRS works to ensure that walk-in sites have a listing of 
services, hours, and locations of the volunteer sites in their area. As 
of March 2004, there are approximate 11,600 volunteer sites. IRS also 
promotes its telephone operations and Web site at its walk-in sites as 
well.

The quality of tax law assistance[Footnote 25] provided at IRS's walk-
in sites in 2004 was comparable to the same period last year. This 
conclusion is based on TIGTA reviews[Footnote 26] through February 
2004.

Concluding Observations:

Congress has been supportive of IRS's efforts to improve service to 
taxpayers and increase enforcement staff and IRS has succeeded at the 
former. However, despite budgets that were almost fully funded and 
realizing savings through efficiency gains, IRS has not been able to 
increase enforcement staff. In fact, staffing of key enforcement 
occupations has declined. The declines in IRS's enforcement staff and 
the related declines in its enforcement efforts raise concerns that 
taxpayers' incentives to voluntarily comply with their tax obligations 
could be eroding.

Strengthening enforcement programs by increasing staffing while 
providing a high level of taxpayer service will continue to be a 
challenge for IRS. Unbudgeted costs are expected to compete for the 
funds IRS has allocated in its 2005 budget request for new spending 
including the enforcement initiatives. If, as has been the case in 
recent years, IRS fails to realize all expected savings then the funds 
available for new spending would be further reduced.

One option for increasing enforcement staff in the near-term is to 
reconsider the level and types of service IRS provides to taxpayers. 
Taxpayer services are much improved raising a question about the 
appropriate balance to strike between investing in further service 
improvements and enforcement. At the same time, the use of IRS's walk-
in assistance sites is declining. The improvements in telephone 
service, increased Web site use, and the availability of volunteer 
sites raise a question about whether IRS should continue to operate as 
many walk-in sites. Reconsidering the level and types of service is an 
option--but not a recommendation--to be considered by IRS management 
and the Congress.

The challenge of increasing IRS's enforcement staff highlights the 
importance of succeeding with NRP and BSM. NRP should, if completed 
successfully, provide the first new data to estimate the voluntary 
compliance rate since IRS last estimated the compliance rate using 1988 
data. The new estimates could have implications for future IRS budgets. 
If compliance rates are comparable to those estimated using 1988 data, 
the pressure to increase IRS' s enforcement staff would likely 
diminish. If, however, compliance rates are down, the pressure to 
increase enforcement staff and the pressure on IRS's budget could 
increase.

BSM and related initiatives such as electronic filing hold the long-
term promise of efficiency gains that could allow IRS to improve both 
taxpayer service and enforcement without significant budget increases. 
However, cost overruns and schedule delays associated with on-going BSM 
projects, along with planned reductions to the BSM project portfolio 
mean that many of these benefits will not be realized in the short 
term. As we have recommended, various management controls and 
capabilities need to be fully implemented and institutionalized. 
Otherwise the projects will likely encounter additional cost and 
schedule shortfalls.

[End of section]

Appendix I: How IRS Allocated Expenditures and Staff Resources in 
Fiscal Year 2003:

In our review of IRS's 2004 budget request, we provided figures showing 
IRS's expenditures and staff allocations in fiscal year 2002.[Footnote 
27] Figures 5 and 6 illustrate how the Internal Revenue Service (IRS) 
allocated expenditures and staff in fiscal year 2003.

Figure 5 shows that total expenditures increased from $10.4 billion in 
2002 to $11.8 billion in 2003. While the division of expenditures 
across categories has generally remained the same as 2002 allocations, 
equipment increased from 4 to 6 percent of total expenditures from 2002 
to 2003.

Figure 5: IRS's expenditures in fiscal year 2003:

[See PDF for image]

[End of figure]

Figure 6 shows IRS's total staff resources have decreased slightly from 
99,180 in 2002 to 98,381 in 2003. IRS's allocation of staffing 
resources remained largely similar, but with a 1 percentage point 
decrease in the percent of staff years processing tax returns. The 
boundaries between the categories presented in these figures may not be 
well defined. For example, staff categorized under providing management 
and other services could also be considered under taxpayer service, 
processing, or compliance. Therefore, the figures are meant to provide 
a summary of how IRS uses its resources and should be interpreted with 
caution. However, the 1 percentage point decrease in staff years 
devoted to processing tax returns is important because it represents a 
cumulative payoff from electronic filing and shows the potential for 
shifting IRS resources from one area to another.

Figure 6: How IRS spent its 98,381 staff years in fiscal year 2003:

[See PDF for image]

[End of figure]

[End of section]

FOOTNOTES

[1] U.S. General Accounting Office, Tax Administration: IRS Needs to 
Further Refine Its Tax Filing Season Performance Measures, GAO-03-143 
(Washington, D.C.: Nov. 22, 2002) and U.S. General Accounting Office, 
Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements, 
GAO-04-126 (Washington, D.C.: Nov. 13, 2003):

[2] Although IRS officials were able to produce more complete 
supporting documentation on cost estimates and savings justifications 
than for fiscal year 2004, we were unable to verify actual IRS claims 
on savings and reinvestments. IRS's budget office generally accepts the 
savings and reinvestment data claimed by various IRS operating 
divisions, and reduces the budget allocation of the unit that 
identified the savings. If expected savings do not materialize, the 
operating division must either find a way to make up the savings 
elsewhere with new efficiencies, reduce expected expenditures, or 
petition for additional resources from other parts of the organization.

[3] U.S. General Accounting Office, Tax Administration: IRS Should 
Continue to Expand Reporting on Its Enforcement Efforts, GAO-03-378, 
(Washington, D.C.: Jan. 31, 2003). 

[4] U.S. General Accounting Office, Tax Administration: IRS is 
Implementing the National Research Program as Planned, GAO-03-614, 
(Washington, D.C.: June 16, 2003). 

[5] This fiscal year 1997 Omnibus Consolidated Appropriations Act, Pub. 
L. 104-208, renamed both Division D (the Federal Acquisition Reform 
Act) and E (the Information Technology Management Reform Act) of the 
1996 Department of Defense Authorization Act, Pub. L. 104-106, as the 
Clinger Cohen Act of 1996.

[6] P.L. 103-62.

[7] See, for example, Office of Management and Budget, Preparing, 
Submitting, and Executing the Budget, Circular No. A-11 (Washington, 
D.C.: July 25, 2003).

[8] See U.S. General Accounting Office, Tax Systems Modernization: 
Management and Technical Weaknesses Must Be Corrected If Modernization 
Is to Succeed, GAO/AIMD-95-156 (Washington, D.C.: July 26, 1995); Tax 
Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season, and 
Fiscal 1998 Budget Request, GAO/T-GGD/AIMD-97-66 (Washington, D.C.: 
March 18, 1997); Tax Systems Modernization: Blueprint is a Good Start 
But Not Yet Sufficiently Complete to Build or Acquire Systems, GAO/
AIMD/GGD-98-54 (Washington, D.C.: February 24, 1998); and Tax 
Administration: IRS' 2000 Tax Filing Season and Fiscal Year 2001 Budget 
Request, GAO/T-GGD/AIMD-00-133 (Washington, D.C.: March 28, 2000).

[9] An enterprise architecture provides an institutional "blueprint" 
for defining how an organization operates today (baseline environment) 
in both business and technological terms, and how it wants to operate 
in the future (target environment). It also includes a sequencing plan 
that provides a road map for transitioning between these environments.

[10] P.L. 108-199, Div. F, Title II, Jan. 23, 2004.

[11] IRS's BSM expenditure plans are required to (1) meet the capital 
planning and investment control review requirements established by OMB, 
(2) comply with IRS's enterprise architecture, (3) conform with IRS's 
enterprise life cycle methodology, (4) be approved by IRS, Treasury, 
and OMB, (5) be reviewed by GAO, and (6) comply with federal 
acquisition rules, requirements, guidelines, and systems acquisition 
management practices.

[12] Initial operation refers to the point at which a project is 
authorized to begin enterprisewide deployment.

[13] Full deployment refers to the point at which enterprisewide 
deployment has been completed and a project is transitioned to 
operations and support.

[14] 44 U.S.C. ß 3506(h).

[15] P.L. 104-106.

[16] See, for example, U.S. General Accounting Office, Information 
Technology Investment Management: A Framework for Assessing and 
Improving Process Maturity, GAO-04-394G (Washington, D.C.: March 2004, 
Version 1.1).

[17] U.S. General Accounting Office, Internal Revenue Service: 
Assessment of Budget Request for Fiscal Year 2003 and Interim Results 
of 2002 Tax Filing Season, GAO-02-580T (Washington, D.C.: Apr. 9, 2002) 
and Internal Revenue Service: Improving Adequacy of Information Systems 
Budget Justification, GAO-02-704 (Washington, D.C.: June 28, 2002).

[18] P.L. 105-206.

[19] In 2003, the IRS, through Financial Management Service, issued 
advanced child tax credit payments to more than 25 million taxpayers in 
a manner similar to the 86 million advance refund checks issued in 
2001. See U.S. General Accounting Office, Tax Administration: IRS 
Issued Advance Child Tax Credit Payments on Time, but Should Study 
Lessons Learned, GAO-04-372 (Washington, D.C.: Feb.17, 2004). 

[20] P.L. 105-206. 

[21] U.S. General Accounting Office, Internal Revenue Service: 
Assessment of Fiscal Year 2004 Budget Request and 2003 Filing Season 
Performance to Date, GAO-03-641T (Washington, D.C.: Apr. 8, 2003).

[22] Some slowing of the growth rate might be expected because, for 
example, taxpayers most easily attracted to electronic filing have 
already been converted.

[23] In 2003 IRS entered into a 3-year-agreement with the Free File 
Alliance, a consortium of tax preparation companies, to provide free 
electronic filing to taxpayers that access any of the companies via a 
link from the IRS Web site. IRS is in the second year of its initiative 
with the Free File Alliance, and there are currently 17 companies that 
are offering free filing via IRS's Web site.

[24] GAO-04-84. 

[25] IRS determines the quality of account assistance after the filing 
season. Only tax law assistance is evaluated during the filing season. 

[26] TIGTA determines tax law accuracy by measuring the percentage of 
correct answers to questions asked during anonymous visits to a sample 
of walk-in sites. Questions were designed by TIGTA to cover a range of 
tax law topics and assess whether taxpayers were receiving correct 
answers to questions that a taxpayer might ask when visiting a walk-in 
site. The TIGTA results are statistically valid only for the times and 
the locations within which respondents were surveyed. 

[27] GAO-03-641T.