This is the accessible text file for GAO report number GAO-02-704 
entitled 'Internal Revenue Service: Improving Adequacy of Information 
Systems Budget Justification' which was released on June 28, 2002.



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GAO: General Accounting Office:



Report to the Commissioner of Internal Revenue:



June 2002: Internal Revenue Service: Improving Adequacy of Information 

Systems Budget Justification:



GAO-02-704:



contents:



Letter:



IRS’s Information Systems Request for Operations and Maintenance Is Not 

Adequately Justified:



Recommendation for Executive Action:



Agency Comments:



Appendixes:



Appendix I: Comments from the Internal Revenue Service:



Appendix II: GAO Contact and Staff Acknowledgements:



GAO Contacts:



Staff Acknowledgement:



Abbreviations:



IRS: Internal Revenue Service:



IS: information systems:



IT: information technology:



June 28, 2002:



The Honorable Charles O. Rossotti Commissioner of Internal Revenue:



Dear Mr. Rossotti:



On April 9, 2002, we testified before the Subcommittee on Oversight, 

House Committee on Ways and Means, on the Internal Revenue Service’s 

(IRS) fiscal year 2003 budget request. [Footnote 1] In brief, we 

reported that although IRS had adequately justified its $450 million 

Business Systems Modernization request, it did not develop its $1.63 

billion information systems (IS) operations and maintenance request in 

accordance with the best practices of leading private- and public-

sector information technology (IT) organizations. This report 

officially transmits both the results we reported and the 

recommendation we made to you in our testimony. Before our testimony, 

we discussed the results of our work with IRS officials, and they 

agreed with our findings and recommendation. We performed our work from 

February through April 2002, in accordance with generally accepted 

government auditing standards.



IRS’s Information Systems Request for Operations and Maintenance Is Not 

Adequately Justified:



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 the Office of Management and 

Budget and us. [Footnote 2] 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 operations and maintenance budget requests. 

These approaches also provide a way to hold IT managers accountable for 

operations and maintenance spending and the ongoing efficiency and 

efficacy of existing systems.



IRS did not develop its IS request in accordance with these best 

practices of leading organizations. In particular, the largest elements 

of IRS’s budget request are not projects or systems. Rather, they are 

requests for staffing levels or other services. For example, IRS is 

requesting $240 million for staff and equipment supporting operations 

and maintenance of desktop computers agencywide, as well as $111 

million for staff and equipment supporting its major computing centers’ 

operations. Further, the agency is requesting $266 million for 

telecommunications services contracts. Taken together, these three 

initiatives constitute about 38 percent of the total $1.63 billion 

being requested for operations and maintenance, but the budget request 

gives no indication regarding how these initiatives are allocated to 

systems. In addition, in developing these requests, IRS did not 

identify and assess the relative costs, benefits, and risks of specific 

projects or systems in these areas. Instead, according to IRS officials 

responsible for developing the IT operations and maintenance budget, 

they simply took what was spent last year in these categories and added 

the money to fund cost-of-living and salary increases.



These IRS officials attributed the gap between IRS’s practices and 

those followed by leading organizations to the lack of an adequate cost 

accounting system, cultural resistance to change, and a previous lack 

of management priority. To better justify future budget requests, these 

officials said that they have assessed the strengths and weaknesses of 

IRS’s budgeting and investment management processes against our IT 

investment management framework [Footnote 3] and found significant 

weaknesses in 15 critical areas. To address the weaknesses, IRS is 

currently developing capital planning guidance that is based on our IT 

investment management framework. This guidance is to be issued by late 

summer 2002, but a schedule for implementing it had yet to be 

determined. In addition, IRS had adopted and was in the process of 

implementing a cost model that is to enable it to account for the full 

costs of operations and maintenance projects and determine how 

effectively IRS projects are achieving program goals and mission needs. 

IRS plans to have the cost model in place and operational by June 30 of 

this year so that it can validate its fiscal year 2003 IS appropriation 

request and begin using the cost model to develop the fiscal year 2004 

request.



Although IRS has initiated actions to address the previously noted 

weaknesses, we are concerned about whether these actions will be 

implemented in time to have meaningful impact on formulation of the 

fiscal year 2004 budget request. For example, IRS had not yet developed 

a plan and schedule for implementing its IT capital planning guidance. 

In addition, IRS officials told us they are already beginning the 

process to develop the fiscal year 2004 budget. Consequently, until IRS 

overcomes its obstacles, the agency’s future IS appropriation requests, 

like its fiscal year 2003 request, will not be adequately justified.



Recommendation for Executive Action:



We recommend that the Commissioner of Internal Revenue direct the 

Budget Director, Modernization, Information Systems, and Security 

Services, to prepare IRS’s fiscal year 2004 IS budget request in 

accordance with leading organizations’ best practices. At a minimum, 

this should include (1) adopting these best practices as an explicit 

priority and (2) employing these practices in time for use in 

developing the fiscal year 2004 budget request.



Agency Comments:



In commenting on a draft of this report, the Commissioner of Internal 

Revenue agreed with our recommendation, adding that IRS understands its 

importance and is taking actions to fully implement it. The 

Commissioner described IRS’s ongoing and planned efforts relating to 

implementing best practices and addressing our recommendation, 

including specifying milestones for when these initiatives will be 

fully implemented. The Commissioner’s written comments are reprinted in 

appendix I.



As you know, 31 U.S.C. 720 requires the head of a federal agency to 

submit a written statement of the action taken on our recommendation to 

the Senate Committee on Governmental Affairs and the House Committee on 

Government Reform not later than 60 days from the date of this report. 

A written statement must also be submitted to the House and Senate 

Committees on Appropriations with the agency’s first request for 

appropriations made more than 60 days after the date of this report.



We are sending copies of this report to the Chairmen and Ranking 

Minority Members of Senate and House committees and subcommittees that 

have appropriations, authorization, and oversight responsibilities for 

IRS. We are also sending copies to the Secretary of the Treasury, the 

Chairman of the IRS Oversight Board, and the Director of the Office of 

Management and Budget. In addition, this report will be available at no 

charge on the GAO Web site at http://www.gao.gov.



Should you or your staff have questions on matters discussed in this 

report, please contact me at (202) 512-3439. I can also be reached by 

e-mail at hiter@gao.gov. A GAO contact and key contributors to this 

report are listed in appendix II.



Sincerely yours,



Randolph C. Hite Director, Information Technology Architecture and 

Systems Issues:



Signed by Randolph C. Hite.



(310237):



FOOTNOTES



[1] 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).



[2] See, for example, U.S. General Accounting Office, Information 

Technology Investment Management: A Framework for Assessing and 

Improving Process Maturity, Exposure Draft, GAO/AIMD-10.1.23 

(Washington, D.C.: May 2000, Version 1).



[3] GAO/AIMD-10.1.23.



[End of Section]



Appendix I: Comments from the Internal Revenue Service:



DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 

20224:



COMMISSIONER:



June 13, 2002:



Mr. Joel C. Willemssen Managing Director, Information Technology 

Issues:



U.S. General Accounting Office 441 G Street, N.W. Washington, D.C. 

20548:



Dear Mr. Willemssen:



I am writing to comment on the General Accounting Office (GAO) Draft 

Report, “Internal Revenue Service: Improving Adequacy of Information 

Systems Budget Justification (Job Code 310237).” The GAO’s report 

recommending improvement to the analysis and justification of our 

information systems budget is accurate and timely. The Modernization 

Information Technology and Security (MITS) Services organization is 

reorganizing and realigning people, operations, and service delivery to 

IRS customers, which will help us apply financial best practices to 

improve:



* Budget development:



* Investment decisions:



* Information technology resources management:



During the past six months, MITS Services has fundamentally improved 

the financial management and budgeting processes for IT funding by 

aligning the budget for FY 2002 - FY 2004 with:



* Responsible organizations and executives:



* Specific operational activities:



* Specific projects for investments:



We included in this process consistent budget planning and forecasting 

for all IT resources and performance measures for each program area.



We also realigned the MITS Services budgetary resources to meet the IRS 

business priorities within essentially flat budgets from FY 2002 - FY 

2004. We prioritized significant investment projects through an agency-

wide portfolio management process that included Tiers A, B, and a 

significant portion of C. For the first time, we included 
infrastructure 

investments in the portfolio prioritization that resulted in aggressive 

targets and significant savings in operational and maintenance 

activities and funding increases to modernization support, high-speed 

remote access for revenue agents, and improvement projects for 
operating 

division to provide enhancements of installed systems.



Over the last six months, we have aggressively used best practices in 

developing our FY 2004 budget request.We also used best practices to 

analyze and allocate our FY 2004 plan and budget. We will continue to 

fully implement the best practices for operating and maintaining 

existing systems and improving our planning and budgeting procedures.



We understand the importance of correcting the issues you identified. 

We are taking actions to resolve them. I have enclosed our response to 

your recommendations. Thank you for your hard work in preparing this 

comprehensive report, your support of the IRS, and your ongoing 

counsel.



Sincerely,



Charles O. Rossotti:



Signed by Charles O. Rossotti:



Enclosure:



Response to the GAO Recommendations Improving Adequacy of Information 

Systems Budget Justification (Job Code 310237):



The GAO report contains four recommendations based on the leading 

private and public sector organizations’ systems-centered approach to 

managing new investments and their operations and maintenance of 

existing systems. We are taking the following actions in response:



1. Identifying operations and maintenance projects and systems for 

inclusion in budget requests. As part of the MITS Services 

reorganization, the Directors of Information Technology Services (ITS), 

Security, and Human Resources andTraining are now planning and 

budgeting all MITS Services resources. The MITS Services Directors 

identified program activities, operations, and maintenance projects 

that support daily operations with the goal to reduce costs and align 

resources to improve service delivery. This included reviewing and 

realigning current operations and maintenance projects and systems 

for the FY 2002, FY 2003, and FY 2004 budgets. To improve service 

delivery and performance, we used a pilot activity-based costing 

software package called the “IT Cost-of-Services model” to aid in 

allocating labor and non-labor resources. The MITS Services Directors 

spent considerable time during the first six months of FY 2002 

identifying activities and cost drivers within their respective 

units. We used this information and performance metrics to analyze 

and project costs for the FY 2004 budget. The IT Cost-of-Services 

model (still in development) includes all MITS Services activities, 

and we are using it to plan, project, and report costs for business 

tasks/activities funded by the IT budget (labor and non-labor). We 

plan to complete the model design and pilot during the final quarter 

of FY 2002.



2. Assessing these projects or systems based on costs, benefits, and 

risks to the organization. The MITS Services organization uses a 

business case methodology to assess proposed investments in the 

Business Systems Modernization (BSM) program. In addition, we are 

developing a capital planning guide to provide capital planning and 

investment control, budget formulation and execution, and procurement 

and acquisition processes and procedures. We are applying business case 

and capital planning methodology to MITS Services’ current operations 

and maintenance activities. For the FY 2004 budget, the MITS Services 

senior team is using the newly identified IT program activities and 

projects to assess projected costs for security, web services, end user 

support (Tier III), business systems development, and enterprise 

operations. However, because we have not fully developed the process, 

we are assessing the benefits and risks at a higher level than called 

for by the GAO. We are designing a capital planning process to address, 

in detail, prioritization and cost benefit analysis with risk 

assessments. We anticipate developing a draft capital planning guide by 

September 2002.



3. Analyzing these projects as a portfolio of competing funding 

options. The MITS Services organization addressed program activities 

and competing priorities within a flat budget for FY 2003 and FY 2004. 

Specifically, we are managing MITS Services program budget as a 

portfolio. Working within a known funding allocation for the 

Information Systems Multi-Year (ISY) budget, the MITS Services senior 

leadership team analyzed all hardware and software operations and 

maintenance funding as one portfolio. This included comparing 

requirements for end user support (Tier III), enterprise operations, 

business systems development, web services, security requirements, and 

general management. For the Tier B projects, MITS Services led a 

prioritization process with the business systems staffs of the business 

units to assess funding needs for Tier B projects. We realize we need 

to implement a consistent process to manage our portfolio and 

prioritize business requirements from the IRS business units. The 

capital planning guide will include requirements for IT portfolio 

management and the IRS’s planning, budgeting, and performance 

management policies, processes, and practices.



4. Using this information to develop and support budget requests. The 

MITS Services organization used costs, benefits, and risk and 

performance measures for planning and budgeting IT services at a high 

level for the FY 2004 budget. For the FY 2004 budget, we believe we 

have initiated a process to establish a robust portfolio of IT 

activities for operating and maintaining the ISY $1.5 billion budget. 

This process includes using the IT Cost-of-Services model to provide a 

bridge between traditional budget planning and reporting and the MITS 

Services operations. The model includes:



* Developing a Capital Planning Guide:



* Developing Business Case processes required for new IT funding 

requests, patterned after the BSM method:



* Developing an IT project portfolio, patterned after the BSM process:



[End of section]



Appendix II: GAO Contact and Staff Acknowledgments:



GAO Contact:



Gary N. Mountjoy, (202) 512-6367:



Staff Acknowledgments:



In addition to the individual named above, other key contributors to 

this report were Bernard R. Anderson, Michael P. Fruitman, Timothy D. 

Hopkins, and Ona M. Noble.



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