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Cover
================================================================ COVER


High-Risk Series

February 1997

IRS MANAGEMENT

GAO/HR-97-8

IRS Management


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

  CFO - Chief Financial Officer
  DPS -
  EFDS - Electronic Fraud Detection System
  IRS - Internal Revenue Service
  QRP - Questionable Refund Program
  SSN - Social Security Number
  TSM - Tax systems modernization

Letter
=============================================================== LETTER



February 1997

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas its work identified as
high risk because of their vulnerability to waste, fraud, abuse, and
mismanagement.  This effort, which was supported by the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight, brought a much-needed focus on
problems that were costing the government billions of dollars. 

In December 1992, GAO issued a series of reports on the fundamental
causes of problems in high-risk areas, and in a second series in
February 1995, it reported on the status of efforts to improve those
areas.  This, GAO's third series of reports, provides the current
status of designated high-risk areas. 

This report discusses four high-risk areas at the Internal Revenue
Service involving (1) the multibillion dollar Tax Systems
Modernization initiative, (2) substantial financial management
weaknesses which diminish IRS' ability to assess the results of
operations or measure performance, (3) problems in the management and
collection of billions of dollars in tax accounts receivable, and (4)
significant levels of tax filing fraud.  Congress has signaled its
concern over these problems through its oversight and funding
decisions, and Treasury and IRS have made some progress in addressing
problems in each of these four high-risk areas since our last
high-risk report series.  However, IRS faces a number of significant
challenges to continuing this progress, particularly in its efforts
to modernize its operations.  A sustained, agency-wide commitment
will be critical to resolving these serious problems. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of Congress, the Director
of the Office of Management and Budget, and the heads of major
departments and agencies. 

James F.  Hinchman
Acting Comptroller General
of the United States


OVERVIEW
============================================================ Chapter 0

The Internal Revenue Service's (IRS) mission is to collect the proper
amount of tax revenue in a fair and efficient manner at the least
cost to the public.  For fiscal year 1995, IRS reported collecting
$1.4 trillion from taxpayers, processing over a billion tax returns
and related documents, disbursing $122 billion in tax refunds, and
managing an estimated accounts receivable inventory of $113 billion. 
In addition, IRS administered a reported $400 billion in tax
expenditures.  To ensure its ability to efficiently and fairly
administer the nation's tax system, IRS has articulated a business
vision for 2001.  This vision calls for reducing the volume of paper
returns, providing better customer service, and improving compliance
by modernizing IRS' operations. 

Since developing its business vision in 1992, IRS has made some
progress in modernizing its operations; however, the gap between IRS'
current level of performance and that proposed in its vision is
great.  Specifically, the efficient administration of the nation's
tax system is undermined by problems in four areas of IRS'
operations:  tax systems modernization (TSM), financial management,
accounts receivable, and filing fraud.  These four areas were
identified in our 1995 High-Risk Series as being especially
vulnerable to waste, fraud, abuse, and mismanagement.\1 Improvements
have been made, but these areas continue to have problems that
warrant their inclusion in our 1997 High-Risk Series. 

<head1<THE PROBLEM

IRS is an agency trying to respond to the demands of the 1990s with
1950s processes and 1970s technology.  For years we have chronicled
IRS' struggle to modernize and manage its operations, especially in
the four high-risk areas, and have made scores of recommendations to
improve IRS' systems, processes, and procedures.  Without
successfully modernizing operations in the high-risk areas, IRS is
unlikely to achieve the goals in its business vision. 

A key factor for explaining IRS' difficulties in the high-risk areas
is its lack of a comprehensive implementation strategy or detailed
business plan for modernization.  Such a strategy would guide IRS in
setting priorities, changing internal management and administrative
processes, developing necessary in-house technical skills, and
acquiring relevant technology.  To be successful, this strategy
should include performance measures that could be used by Congress,
the Department of the Treasury (Treasury), and IRS to track IRS'
progress in accomplishing its vision. 

The problems IRS confronts in attempting to eliminate its high-risk
vulnerabilities are compounded by their interdependencies. 
Specifically, IRS' success in addressing its financial management,
accounts receivable, and filing fraud vulnerabilities is linked to
its success in modernizing its information systems.  IRS' processes
and systems were not designed to address the critical needs and
vulnerabilities that IRS confronts today.  These processes and
systems must be modernized to support IRS' business vision and to
address its high-risk areas.  However, until clearly defined business
requirements drive IRS' modernization efforts, there is no assurance
that these efforts will achieve IRS' vision or improve its
operations. 


--------------------
\1 GAO/HR-95-20SET. 


   PROGRESS
---------------------------------------------------------- Chapter 0:1

IRS has made some progress in addressing the problems we have
identified in the four high-risk areas.  For example, IRS is
finalizing a comprehensive strategy to maximize electronic filing and
has begun initiatives to develop a complete integrated systems
architecture.  In response to our recommendations, IRS has also begun
to plan both short-term and long-term solutions to its financial
management problems, has implemented a new administrative accounting
system, and has transferred its payroll processing to the Department
of Agriculture's National Finance Center. 

In dealing with its accounts receivable problems, IRS has streamlined
selected notification and collection processes and is developing ways
to adjust its collection techniques to address the various
characteristics of delinquent taxpayers.  IRS' effort to further
prevent and deter the filing of fraudulent tax returns has involved
increasing the electronic filters and manual checks to (1) screen
electronic and paper returns for problems, (2) determine the
suitability of those who want to serve as preparers or transmitters
of electronic returns, and (3) better identify questionable refund
claims. 


   OUTLOOK FOR THE FUTURE
---------------------------------------------------------- Chapter 0:2

While we are encouraged by IRS' and Treasury's actions, we remain
concerned because continued progress is needed to fully implement
essential improvements.  This is particularly true of IRS'
modernization efforts because of their key role in resolving the
other issues, such as the problems identified in IRS' revenue
accounting systems.  At the same time, the nation's tax debt
inventory will continue to grow, and filing fraud will continue to be
a concern.  Until IRS sustains an agencywide commitment and devotes
the necessary management attention to addressing the challenges it
faces in modernizing its processes and systems, it cannot hope to
solve its high-risk problems. 

Recent increased oversight of IRS reflects the broad-based concern
over these issues.  Congress has signaled its concern over IRS' slow
progress in modernizing its processes and systems by (1) cutting IRS'
budget requests for funds to support its modernization efforts, (2)
withholding additional modernization funding until IRS successfully
addresses certain identified problems, and (3) directing Treasury to
assess and report on IRS' progress in taking corrective action. 
Likewise, Treasury has attempted to assist in IRS' overall
modernization planning and decision-making by directing IRS to rely
more heavily on the technical expertise of outside contractors and by
establishing a review board to monitor IRS' information technology
investments. 

In addition, Congress established the National Commission on
Restructuring IRS and gave the Commission a broad charter for
reviewing IRS' management and operations. 


HIGH-RISK AREAS
============================================================ Chapter 1

The four areas in IRS that we have deemed high risk require
comprehensive business strategies to ensure that IRS' new and revised
processes drive systems development and acquisition.  These areas
also require accurate and reliable information systems and
performance measures to track IRS' progress and provide the data
necessary to make informed management decisions. 


   TAX SYSTEMS MODERNIZATION
---------------------------------------------------------- Chapter 1:1

Over the last decade, IRS has been attempting to overhaul its
timeworn, paper-intensive approach to tax return processing.  In
1995, we identified serious management and technical weaknesses in
the modernization program that jeopardize its successful completion,
recommended many actions to fix the problems, and added IRS'
modernization to our high-risk list.  Since then, IRS and Treasury
have together taken several steps to implement our recommendations,
but much remains to be done.  At stake is the over $3 billion that
IRS has spent or obligated on this modernization since 1986, as well
as any additional funds that IRS plans to spend on modernization. 

In July 1995, we reported that IRS (1) did not have a comprehensive
business strategy to cost-effectively reduce paper tax return filings
and (2) had not yet fully developed and put in place the requisite
management, software development, and technical infrastructure
necessary to successfully implement its ambitious, world-class
modernization.  We also reported that IRS lacked an overall systems
architecture, or blueprint, to guide the modernization's development
and evolution. 

At that time, we made over a dozen recommendations to the IRS
Commissioner to address these weaknesses.  Collectively, the
recommendations called for IRS to (1) formulate a comprehensive
business strategy for maximizing electronic filings, (2) improve its
strategic information management by implementing a process for
selecting, prioritizing, controlling, and evaluating the progress and
performance of all major information systems and investments, (3)
implement disciplined, consistent procedures for software
requirements management, quality assurance, configuration management,
and project planning and tracking, and (4) complete and enforce an
integrated systems architecture and security and data architectures. 
IRS agreed to implement our recommendations. 

In May 1996, Treasury reported to the House and Senate Appropriations
Committees on steps under way and planned to exert greater management
oversight over IRS' modernization efforts.\1 For example, it
established a Modernization Management Board as the primary review
and decision-making body for modernization and for policy and
strategic direction.  In addition, Treasury scaled back the overall
size of the modernization by approximately $2 billion and is working
with IRS to obtain additional contractor help to accomplish the
modernization. 

Pursuant to congressional direction, we assessed IRS' actions to
correct its management and technical weaknesses, as delineated in
Treasury's report on tax systems modernization.  We reported in June
and September 1996 that IRS had initiated many activities to improve
its modernization efforts but had not yet fully implemented any of
our recommendations.  Consequently, in order to minimize the risk
attached to continued investment in its systems modernization, we
suggested to Congress that it consider limiting modernization funding
exclusively to cost-effective efforts that (1) support ongoing
operations and maintenance, (2) correct IRS' pervasive management and
technical weaknesses, (3) are small, represent low technical risk,
and can be delivered quickly, and (4) involve deploying already
developed and fully tested systems that have proven business value
and are not premature given the lack of a completed architecture. 

To help oversee IRS' modernization, Congress in the fiscal year 1997
Omnibus Consolidated Appropriations Act\2 directed IRS to (1) submit
by December 1, 1996, a schedule for transferring a majority of its
modernization development and deployment to contractors by July 31,
1997, and (2) establish a schedule by February 1, 1997, for
implementing our recommendations by October 1, 1997.  In its
conference report on the act, Congress directed the Secretary of the
Treasury to (1) provide quarterly reports on the status of IRS'
corrective actions and modernization spending\3 and (2) submit by May
15, 1997, a technical architecture for the modernization that has
been approved by Treasury's Modernization Management Board. 
Additionally, the Board was directed to prepare a request for
proposals by July 31, 1997, to acquire a prime contractor to manage
modernization deployment and implementation. 

IRS has continued to take steps to address our recommendations and
respond to congressional direction.  For example, IRS hired a new
Chief Information Officer.  It also created an investment review
board to select, control, and evaluate its information technology
investments.  Thus far, the board has reevaluated and terminated
selected major modernization development projects, such as the
Document Processing System (DPS). 

Additionally, IRS (1) provided a November 26, 1996, report to the
Congress that set forth IRS' strategic plan and schedule for shifting
modernization development and deployment to contractors, (2) is
finalizing a comprehensive strategy to maximize electronic filing
that is scheduled for completion in early 1997, and (3) is updating
its system development life cycle methodology and working across
various IRS organizations to define disciplined processes for
software requirements management, quality assurance, configuration
management, and project planning and tracking.  Additionally, IRS is
developing a technical architecture for the modernization and plans
to provide this to Congress by May 15, 1997.  Further, IRS is
preparing a schedule for implementing our recommendations and plans
to provide it to Congress in February 1997. 

While we recognize IRS' and Treasury's actions to address these
problems, we remain concerned.  Much remains to be done to fully
implement essential improvements.  Increasing the use of contractors,
for example, will not automatically increase the likelihood of
successful modernization because IRS does not have the technical
capability needed to manage all of its current contractors.  As a
case in point, IRS' Cyberfile--a system development effort led by
contractors to enable taxpayers to personally prepare and file their
tax returns electronically--exhibited many undisciplined software
acquisition practices as well as inadequate financial and management
controls.  Eventually, IRS canceled the Cyberfile project after
spending over $17 million and without fielding any of the system's
promised capabilities.  Therefore, if IRS is to use additional
contractors effectively, it will have to first strengthen and improve
its ability to manage those contractors. 

In addition, IRS needs to continue to make concerted, sustained
efforts to fully implement our recommendations and respond
effectively to the requirements outlined by Congress.  It will take
both management commitment and technical discipline for IRS to do
this effectively.  Accordingly, we plan to continue assessing IRS'
progress in its critical endeavor to modernize. 


--------------------
\1 Report to House and Senate Appropriations Committees:  Progress
Report on IRS's Management and Implementation of Tax Systems
Modernization, Department of the Treasury, May 6, 1996. 

\2 Public Law 104-208, September 30, 1996. 

\3 H.R.  Report No.  863, 104th Cong., 2d sess.  (1996).  Congress
also included the requirement that Treasury provide a milestone
schedule for developing and implementing all modernization projects
in Treasury's fiscal year 1996 appropriations act (Public Law 104-52,
Nov.  19, 1995). 


   FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 1:2

Our audits of IRS' financial statements have outlined the substantial
improvements needed in IRS' accounting and reporting in order to
comply fully with the requirements of the Chief Financial Officers
Act of 1990 (CFO Act).  The audits for fiscal years 1992 through 1995
have described IRS' difficulties in properly accounting for its
reported $1.4 trillion in tax revenues, in total and by reported type
of tax; reliably determining the amount of accounts receivable owed
for unpaid taxes; regularly reconciling its Fund Balance With
Treasury accounts; and either routinely providing support for receipt
of the goods and services it purchases or, where supported,
accurately recording the purchased item in the proper period. 

IRS has made progress in addressing these problems and has developed
an action plan, with specific timetables and deliverables, to address
the issues our financial statement audits have identified.  This is
particularly notable in IRS' administrative accounting operations,
which track its over $7 billion appropriation that funds IRS'
activities.  For example, IRS recently reported that it has
identified substantially all of the reconciling items for its Fund
Balance With Treasury accounts, except for certain amounts IRS has
deemed not to be cost-beneficial to research further.  It also has
successfully transferred its payroll processing to the Department of
Agriculture's National Finance Center and has begun designing both a
short-term and a long-term strategy to fix the problems that
contribute to its nonpayroll expenses being unsupported or reported
in the wrong period. 

Further, in the revenue accounting area, IRS has designed an interim
approach to capture the detailed support for revenue and accounts
receivable until longer-term solutions can be identified and
implemented.  The issues with IRS' revenue accounting operations are
complex, and the remedies needed are multifaceted and encompass
organizational, managerial, technological, and procedural
improvements.  IRS' revenue accounting problems are especially
affected and complicated by automated data processing systems that
were implemented many years ago and thus not designed to support the
financial reporting requirements ushered in by the CFO Act.  Some of
the longer-term actions needed to correct the long-standing problems
in IRS' revenue accounting operations include

  -- implementing software, hardware, and procedural changes needed
     to create reliable subsidiary accounts receivable and revenue
     records that are fully integrated with the general ledger; and

  -- implementing software changes that allow the detailed taxes
     reported to be maintained separately from the results of
     compliance efforts that would not be valid financial reporting
     transactions in the masterfile, other related revenue accounting
     feeder systems, and the general ledger. 

The requirements of the CFO Act have provided the impetus for ongoing
efforts to improve IRS' operations.  They led to IRS' top managers
having a much better understanding than ever before of IRS' serious
accounting and reporting problems, provided information on the
magnitude of IRS' tax receivables collection problems, and identified
the need for stronger controls over such areas as payroll operations. 

IRS has made progress in responding to our recommendations.  Over the
past 4 years, we have made 59 recommendations to improve IRS'
financial management systems and reporting.  IRS agreed with these
recommendations and has been working to implement them and correct
its financial systems and information problems.  IRS has completed
action on some of these recommendations and has efforts under way to
address the remaining areas.  IRS has been directed in the
appropriations committees' conference report to submit a report by
March 1, 1997, that presents a plan to correct the problems
identified in our July 1996 audit report.  As part of our audit of
IRS' fiscal year 1996 financial statements, which was ongoing when
this report was being prepared, we are examining and will report on
the additional actions IRS has taken to respond to the
recommendations we have made. 

IRS' efforts are intended to position itself to have more reliable
financial statements for fiscal year 1997 and thereafter.  To
accomplish this, especially in accounting for revenue and the related
accounts receivables, IRS will need to institute longer-term
solutions involving reprogramming software for IRS' antiquated
systems and developing new systems as required. 

Follow-through by IRS is essential to ensure that its short-term and
long-term plans are carried out and effectively solve financial
management problems.  While IRS' senior management has resolved to
address these issues, in the past IRS has not always provided the
follow-through needed to complete necessary corrective measures. 
Solving these problems is essential to providing reliable financial
information and ensuring taxpayers that their federal tax dollars are
properly accounted for in accordance with federal accounting
standards.  The accuracy of IRS' financial statements is also
essential to both IRS and Congress for (1) ensuring adequate
accountability for IRS programs, (2) assessing the impact of tax
policies, and (3) measuring IRS' performance and cost effectiveness
in carrying out its numerous tax enforcement, customer service, and
collection activities. 


   ACCOUNTS RECEIVABLE
---------------------------------------------------------- Chapter 1:3

IRS is the government's primary tax collection agency and routinely
collects over a trillion dollars annually.  But many taxpayers are
either unable or unwilling to pay their taxes when due, and as a
result, IRS estimates that its accounts receivable amount to tens of
billions of dollars.  Unfortunately, IRS' long-term efforts to
efficiently and effectively collect the billions of dollars taxpayers
owe in delinquent taxes and to prevent taxpayers from becoming
delinquent have been seriously hampered, primarily by outdated
equipment and processes, incomplete information needed to better
target collection efforts, and the absence of a comprehensive
strategy and detailed plan that address the systemic nature of the
underlying problems. 

On the other hand, short-term results in collecting delinquent taxes
have shown some promise.  In fiscal year 1996, for example, IRS
reported the collection of $29.8 billion in delinquent taxes--the
most ever by IRS.  Furthermore, for the first time since 1989, IRS
also reported that its collection employees took in more money than
they classified as "currently not collectible." While these results
are encouraging, IRS needs to know more about its inventory of tax
assessments and the types of taxpayers who become delinquent each
year to develop effective strategies to efficiently target its
collection resources and to prevent future delinquencies. 

IRS' collection efforts have been hampered by the age of the
delinquent tax accounts.  Because of the outdated equipment and
processes used to match tax returns and related information
documents, it can take IRS several years to identify potential
delinquencies and then initiate collection actions.  In addition,
according to IRS, the 10-year statutory collection period generally
precludes it from writing off uncollectible receivables until that
period has expired.  As a result, the receivables inventory includes
many relatively old accounts that will never be collected because the
taxpayers are deceased or the companies defunct. 

IRS has undertaken many initiatives to deal with its accounts
receivable problems.  These initiatives include correcting errors in
the masterfile records of tax receivables, developing more
information on the makeup of the inventory of tax debts, developing
research systems to identify characteristics of delinquent taxpayers
and appropriate collection techniques, attempting telephone contact
earlier in the collection process, speeding up the collection process
for repeat delinquents, revising the format of bills sent to
delinquent taxpayers, automating many of the processes carried out by
collection employees in field offices, and attempting to collect
compliance-generated delinquencies earlier.  While some of these
efforts appear to have had some impact on collections and the tax
debt inventory, others are long term in nature, and their
effectiveness may not be determined for years.  Further, the problems
with IRS' data and information systems will continue to hinder its
ability to effectively measure the results of these efforts. 

Congress has recently taken actions that could help deal with the
collection of delinquent taxes and the prevention of future
delinquencies.  Legislation requiring more electronic deposits of
employment taxes, expanding voluntary withholding, and authorizing
IRS to test the use of private debt collectors could help reduce
posting errors, prevent taxpayers from becoming delinquent, and
collect more money.  Other actions in areas such as tax delinquencies
related to independent contractors--a group of taxpayers that is
proportionately more delinquent than other groups of
taxpayers--could, if adopted, also help IRS deal with its collection
problems. 

Although the results cannot generally be quantified or traced back to
specific actions or improvements, some of IRS' efforts reportedly
have resulted in increased collections and reduced delinquencies in
the short term.  For example, during fiscal year 1996, IRS revised
the bills sent to taxpayers to make them clearer and easier to
understand, and reported that collections from the billing process
increased from $11.8 billion in fiscal year 1995 to $14.7 billion in
fiscal year 1996.  IRS has also placed more emphasis on collecting
examination assessments at the close of an audit, and preliminary
results have been favorable. 

Until fiscal year 1996, IRS' inventory of tax assessments increased
at a faster pace than collections.  For example, during the period
1991-1996, the inventory increased an average of 16 percent each
year, from $104 billion at the end of fiscal year 1991 to about $216
billion at the end of fiscal year 1996.  Reported collection of
delinquent taxes, however, averaged only a 4.5-percent increase, from
$24.3 billion to $29.8 billion, during that same period. 

We recognize that the growth in the gross inventory is not the best
measure of IRS' performance because it includes penalty and interest
charges that continue to accrue on delinquent accounts, potentially
invalid accounts, and accounts that are truly uncollectible; however,
better figures are not available.  IRS is working toward better
defining its receivables inventory.  For its fiscal year 1995
financial statements, IRS developed a methodology to differentiate
financial accounts receivable from the amounts it has assessed for
compliance purposes.  While the methodology appeared sound, mistakes
in performing the analysis and errors in the underlying data made the
sample results unreliable. 

A number of IRS initiatives hold some potential for future
improvements in both collections and compliance.  For example, IRS is
developing a number of research and evaluative tools that are
intended to determine the most efficient and effective way to handle
cases by identifying those taxpayer characteristics that could
predict the possible outcome of the cases.  In addition, research
databases are being constructed that are intended to allow for
identification of particular groups, and a research structure has
been developed to allow for studies dealing with different groups of
taxpayers.  However, the completion dates for full development of the
databases are currently unknown due to the uncertainty of funding for
IRS' Tax Systems Modernization program.  Even if funding was assured,
it would still take a number of years to identify the root causes of
delinquencies and to develop, test, and implement courses of action
to deal with the causes.  Once the analyses and planning are
completed, it will still be some time before full results of the new
initiatives are realized. 

Nevertheless, the recent increase in reported collections is a good
sign.  As previously mentioned, the $29.8 billion reported in fiscal
year 1996 is the most ever collected.  This sum represents a
19-percent increase over the $25.1 billion reported in fiscal year
1995 and a 17-percent increase over the $25.5 billion reported in
fiscal year 1990--the previous best year.  However, as we said
earlier, IRS does not have the data to determine which actions or
improvements generate changes in program performance such as this. 

Correcting the problems and improving collections will require
long-term and continuous efforts.  To ensure that these efforts are
on the right track, IRS needs a comprehensive strategy that involves
all aspects of IRS' operations.  As part of this strategy, IRS needs
to set priorities; modernize outdated equipment and processes; and
establish goals, timetables, and a system to measure progress. 


   FILING FRAUD
---------------------------------------------------------- Chapter 1:4

When we first identified filing fraud as a high-risk area in February
1995, the amount of filing fraud being detected by IRS was on an
upward spiral.  From 1991 to 1994, the number of fraudulent returns
that IRS detected rose from 11,168 to 77,781, and the total amount of
fraudulent refunds detected rose from $42.9 million to $160.5
million.  In 1995, after being urged to take immediate action by us,
Congress, and a Treasury task force, IRS introduced new controls and
expanded existing controls in an attempt to reduce its exposure to
filing fraud.  Those controls were directed toward either (1)
deterring the filing of fraudulent returns or (2) identifying
questionable returns after they have been filed. 

To deter the filing of fraudulent returns, IRS took several steps
that were focused on electronic filers.  As a result of these steps,
IRS (1) expanded the number of upfront filters in the electronic
filing system designed to screen electronic submissions for problems,
such as missing or incorrect Social Security Numbers (SSN), to
prevent returns with those problems from being filed electronically
and (2) strengthened the process for checking the suitability of
persons applying to participate in the electronic filing program as
return preparers or transmitters by requiring fingerprint and credit
checks. 

To better identify fraudulent returns once they have been filed, IRS
placed an increased emphasis in 1995 on validating SSNs on filed
paper returns and delayed any related refunds to allow time to do
those validations and to check for possible fraud.  IRS also improved
its Questionable Refund Program by (1) revising the computerized
formulas used to score all tax returns as to their fraud potential
and (2) upgrading the Electronic Fraud Detection System (EFDS) to
give staff better research capabilities. 

IRS' efforts produced some positive results.  For example, the number
of SSN problems identified by the electronic filing filters increased
from about 1 million in 1994 to about 4.1 million in 1995.  In
addition, about 350 persons who applied to participate in the
electronic filing program for 1995 were rejected because they failed
the new fingerprint and credit checks.  IRS' efforts to validate SSNs
on paper returns produced over $800 million in reduced refunds or
additional taxes.  Unfortunately, IRS identified many more SSN
problems than it was able to deal with and released about 2 million
refunds without resolving the problems. 

Despite the generally positive results, there is insufficient
information available to determine which of IRS' actions have had a
significant impact on either detecting or deterring filing fraud. 
IRS conducted some studies in 1995 and 1996 that may shed some light
on the effects of its changes and upgrades, but IRS has not released
the results of these studies. 

The number of fraudulent returns identified by IRS has declined
recently, from 77,781 fraudulent returns involving refunds of $160.5
million in 1994 to 62,309 fraudulent returns with refunds of $131.7
million in 1995.  That downward trend continued in 1996, at an even
more significant pace.  During the first 9 months of 1996, IRS
reported detecting 20,521 fraudulent returns involving refunds of
$55.4 million, compared with 59,241 returns totaling $124.8 million
in the first 9 months of 1995.  There is insufficient information
available to determine whether the decline was the result of staff
reductions, changes in the program's operating and reporting
procedures, or a general decline in the incidence of fraud. 

IRS' efforts to control filing fraud are also constrained by the
relatively short time available, after a return is filed and before
any refund is issued, in which to identify a questionable return. 
Therefore, it is critically important for IRS to (1) optimize the
controls, such as upfront filters, that are intended to prevent the
filing of fraudulent returns and (2) maximize the effectiveness of
available staff.  Modernization is the key to achieving these
objectives, and electronic filing is the cornerstone of that
modernization. 

As discussed previously, one of the benefits of electronic filing is
the ability to build controls into the system, in the form of
filters, that prevent returns with certain problems (such as
incorrect SSNs) from being filed electronically.  IRS cannot identify
those kinds of problems on paper returns until after the returns are
filed and, as happened in 1995, is limited in the number of cases it
can pursue by the number of staff available.  One solution to this
dilemma is to increase the percentage of returns filed
electronically.  IRS' business vision calls for increasing the number
of electronic returns to 80 million by 2001.  However, our analysis
of recent filing trends indicated that only about 33 million returns
are expected to be filed electronically by 2001.  To achieve its
goal, IRS must first identify those groups of taxpayers who offer the
greatest opportunity to reduce IRS' paper-processing workload and
operating costs if they were to file electronically.  IRS must then
develop strategies that focus its resources on eliminating or
lessening impediments that inhibit those groups from participating in
the program.  As of early January 1997, IRS was finalizing its
electronic filing strategy. 

The EFDS enables IRS to use its staff more effectively by automating
a process that had been labor and paper intensive and by enhancing
the staff's research and query capabilities.  To date, EFDS has been
used primarily on electronic returns, which accounted for only about
13 percent of all individual income tax returns filed in 1996.  IRS
had planned to expand EFDS to all paper returns, but it is unclear
how those plans will be affected by IRS' recent decisions to
terminate its major paper processing modernization project (the
Document Processing System) and to consider other options for
processing paper returns. 


FURTHER ACTION NEEDED
============================================================ Chapter 2

For years, IRS has struggled to collect the nation's tax revenue
using outdated processes and technology.  The result has often been
inefficient and ineffective programs and operations that are
vulnerable to waste, fraud, abuse, and mismanagement.  Of particular
concern to us, Congress, and others have been IRS' efforts to
modernize its tax systems, manage its administrative and revenue
accounting systems, identify and collect taxes owed the government,
and detect and prevent the filing of fraudulent tax returns. 

These areas of concern share common characteristics that IRS must
address in the very near future.  Specifically, these high-risk areas
lack an overall implementation strategy to guide IRS in the
selection, acquisition, control, integration, security, and
evaluation of modern information systems that would improve its
efficiency and effectiveness.  Program officials in these areas also
do not always have the information needed for their management
decisions.  As a result, any expectation of significant and immediate
improvement in these areas seems unrealistic. 

We believe that IRS must take prompt and determined action to
identify and meet its planning, modernization, and information needs. 
At a minimum, IRS needs an implementation strategy that includes both
performing cost-benefit analyses when prioritizing its needs in the
context of its overall business vision and developing reasonable
estimates of the extent, time frames, and resources required to align
its program areas with its vision.  IRS also needs to better plan for
the purchase and integration of new systems and technologies.  In
addition, IRS must ensure that its administrative and revenue
accounting systems fully comply with government accounting standards
and that it develops performance measures that will allow its
managers, Congress, and us to track its progress. 


RELATED GAO PRODUCTS
============================================================ Chapter 3


   TAX SYSTEMS MODERNIZATION
---------------------------------------------------------- Chapter 3:1

Tax Systems Modernization:  Actions Underway But Management and
Technical Weaknesses Not Yet Corrected (GAO/T-AIMD-96-165, Sept.  10,
1996). 

IRS Operations:  Critical Need to Continue Improving Core Business
Practices (GAO/T-AIMD-96-188, Sept.  10, 1996). 

Internal Revenue Service:  Business Operations Need Continued
Improvement (GAO/AIMD/GGD-96-152, Sept.  9, 1996). 

Tax Systems Modernization:  Cyberfile Project Was Poorly Planned and
Managed (GAO/AIMD-96-140, Aug.  29, 1996). 

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

Security Weaknesses at IRS' Cyberfile Data Center (GAO/AIMD-96-85R,
May 9, 1996). 

Tax Systems Modernization:  Management and Technical Weaknesses Must
Be Overcome to Achieve Success (GAO/T-AIMD-96-75, Mar.  26, 1996). 

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


   FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 3:2

Financial Management:  Challenges Facing the IRS (GAO/T-AIMD-97-34,
Jan.  9, 1997). 

IRS Financial Audits:  Status of Efforts to Resolve Financial
Management Weaknesses (GAO/T-AIMD-96-170, Sept.  19, 1996). 

Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/AIMD-96-101, July 11, 1996). 

Financial Audit:  Actions Needed to Improve IRS Financial Management
(GAO/T-AIMD-96-96, June 6, 1996). 

IRS Operations:  Significant Challenges in Financial Management and
Systems Modernization (GAO/T-AIMD-96-56, Mar.  6, 1996). 

Financial Audit:  Examination of IRS' Fiscal Year 1994 Financial
Statements (GAO/AIMD-95-141, Aug.  4, 1995). 

Financial Audit:  Examination of IRS' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-120, June 15, 1994). 

Financial Audit:  Examination of IRS' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-2, June 30, 1993). 


   ACCOUNTS RECEIVABLE
---------------------------------------------------------- Chapter 3:3

IRS Tax Collection Reengineering (GAO/GGD-96-161R, Sept.  24, 1996). 

Tax Administration:  Tax Compliance of Nonwage Earners
(GAO/GGD-96-165, Aug.  28, 1996). 

Managing IRS:  IRS Needs to Continue Improving Operations and Service
(GAO/T-GGD/AIMD-96-170, July 29, 1996). 

Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/AIMD-96-101, July 11, 1996). 

Tax Research:  IRS Has Made Progress But Major Challenges Remain
(GAO/GGD-96-109, June 5, 1996). 

Tax Administration:  IRS Tax Debt Collection Practices
(GAO/T-GGD-96-112, Apr.  25, 1996). 

Tax Administration:  IRS' Fiscal Year 1996 and 1997 Budget Issues and
the 1996 Filing Season (GAO/T-GGD-96-99, Mar.  28, 1996). 

Status of Tax Systems Modernization, Tax Delinquencies, and the
Potential for Return-Free Filing (GAO/T-GGD/AIMD-96-88, Mar.  14,
1996). 

Financial Audit:  Examination of IRS' Fiscal Year 1994 Financial
Statements (GAO/AIMD-95-141, Aug.  4, 1995). 

Taxpayer Compliance:  Reducing the Income Tax Gap (GAO/T-GGD-95-176,
June 6, 1995). 

Reducing the Tax Gap:  Results of a GAO-Sponsored Symposium
(GAO/GGD-95-157, June 2, 1995). 

Tax Administration:  Administrative Improvements Possible in IRS'
Installment Agreement Program (GAO/GGD-95-137, May 2, 1995). 

High-Risk Series:  Internal Revenue Service Receivables (GAO/HR-95-6,
Feb.  1995). 

Tax Administration:  Tax Compliance Initiatives and Delinquent Taxes
(GAO/T-GGD-95-74, Feb.  1, 1995). 

Tax Administration:  Changes Needed to Reduce Volume and Improve
Processing of Undeliverable Mail (GAO/GGD-95-44, Dec.  7, 1994). 

Financial Audit:  Examination of IRS' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-120, June 15, 1994). 


   FILING FRAUD
---------------------------------------------------------- Chapter 3:4

Earned Income Credit:  IRS' 1995 Controls Stopped Some Noncompliance,
But Not Without Problems (GAO/GGD-96-172, Sept.  18, 1996). 

IRS Efforts to Control Fraud (GAO/GGD-96-96R, Mar.  25, 1996). 

The 1995 Tax Filing Season:  IRS Performance Indicators Provide
Incomplete Information About Some Problems (GAO/GGD-96-48, Dec.  29,
1995). 

Tax Administration:  Electronic Filing Falling Short of Expectations
(GAO/GGD-96-12, Oct.  31, 1995). 

Tax Administration:  Continuing Problems Affect Otherwise Successful
1994 Filing Season (GAO/GGD-95-5, Oct.  7, 1994). 

Tax Administration:  Electronic Filing Fraud (GAO/T-GGD-94-89, Feb. 
10, 1994). 

Tax Administration:  Increased Fraud and Poor Taxpayer Access to IRS
Cloud 1993 Filing Season (GAO/GGD-94-65, Dec.  22, 1993). 

Tax Administration:  IRS Can Improve Controls Over Electronic Filing
Fraud (GAO/GGD-93-27, Dec.  30, 1992). 


1997 HIGH-RISK SERIES
============================================================ Chapter 4

An Overview (GAO/HR-97-1)

Quick Reference Guide (GAO/HR-97-2)

Defense Financial Management (GAO/HR-97-3)

Defense Contract Management (GAO/HR-97-4)

Defense Inventory Management (GAO/HR-97-5)

Defense Weapon Systems Acquisition (GAO/HR-97-6)

Defense Infrastructure (GAO/HR-97-7)

IRS Management (GAO/HR-97-8)

Information Management and Technology (GAO/HR-97-9)

Medicare (GAO/HR-97-10)

Student Financial Aid (GAO/HR-97-11)

Department of Housing and Urban Development (GAO/HR-97-12)

Department of Energy Contract Management (GAO/HR-97-13)

Superfund Program Management (GAO/HR-97-14)

























The entire series of 14 high-risk reports can be ordered by using the
order number GAO/HR-97-20SET. 

*** End of document. ***