IRS 2015 Budget:

Long-Term Strategy and Return on Investment Data Needed to Better Manage Budget Uncertainty and Set Priorities

GAO-14-605: Published: Jun 12, 2014. Publicly Released: Jun 12, 2014.

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What GAO Found

Since fiscal year 2010, the Internal Revenue Service (IRS) budget has declined by about $900 million. As a result, funding is below fiscal year 2009 levels.

IRS Appropriations Fiscal Years 2009 through 2014 and Fiscal Year 2015 Requested Appropriation

IRS Appropriations Fiscal Years 2009 through 2014 and Fiscal Year 2015 Requested Appropriation

Staffing has also declined by about 10,000 full-time equivalents since fiscal year 2010, and performance has been uneven. For example, between fiscal years 2009 and 2013, the percentage of callers seeking live assistance and receiving it fluctuated between 61 percent and 74 percent. IRS took some steps to address budget cuts, such as reduced travel and training.

IRS's strategic plan does not address managing budget uncertainty, although there are several indicators that funding will be constrained for the foreseeable future. For example, in May 2014, the Office of Management and Budget (OMB) generally required a 2 percent reduction in agencies' fiscal year 2016 budget submission. OMB guidance also requires agencies to develop strategies for operating in an uncertain budget environment. According to IRS, extensive senior leadership turnover has contributed to the lack of a long-term strategy. Without a strategy, IRS may not be able to operate effectively and efficiently in an uncertain budget environment.

For fiscal year 2015, IRS calculated projected return on investment (ROI) for most of its enforcement initiatives. However, due to limitations—such as estimating the indirect effect coverage has on voluntary compliance—IRS does not calculate actual ROI or use it for resource decisions. These limitations are important, which is why GAO recommended in 2012 that IRS explore developing such estimates. Given that these limitations could take time to address, GAO demonstrated how IRS could use existing ROI data to review disparities across different enforcement programs to inform resource allocation decisions. Comparing projected and actual ROI is consistent with OMB guidance. While not the only factor in making resource decisions, actual ROI could provide useful insights on the productivity of a program.

Why GAO Did This Study

The financing of the federal government depends largely upon the IRS's ability to collect taxes, including providing taxpayer services that make voluntary compliance easier and enforcing tax laws to ensure compliance with tax responsibilities. For fiscal year 2015, the President requested a $12.5 billion budget for IRS, a 10.5 percent increase over the fiscal year 2014 budget.

Because of the size of IRS's budget and the importance of its service and compliance programs for all taxpayers, GAO was asked to review the fiscal year 2015 budget request for IRS. (In April 2014, GAO reported interim information on IRS's budget.) Among other things, this report assesses IRS's (1) strategy to address budget cuts and (2) use of ROI analysis. To conduct this work, GAO reviewed the fiscal year 2015 budget justification, IRS and OMB budget guidance, and IRS workload and performance data from fiscal years 2009 to 2015. GAO also interviewed IRS officials and the National Taxpayer Advocate.

What GAO Recommends

GAO recommends that IRS (1) develop a long-term strategy to manage uncertain budgets, and (2) calculate actual ROI for implemented initiatives, compare actual ROI to projected ROI, and use the data to inform resource decisions. IRS agreed with GAO's recommendations, noting that it initiated a review of its base budget to ensure resources are aligned with its strategic plan and ROI is one of several factors relevant to making resource allocation decisions.

For more information, contact James R. McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: IRS agreed with our recommendation and is taking steps to implement it. For example, IRS has adopted a new, more strategic approach to identify and select budget program priorities. In its fiscal year 2017 budget justification, IRS introduced six themes of its Future State Initiative for tax administration, which in part aims to deliver service improvements across different taxpayer interactions such as individual account assistance, refunds, identity theft, and billings and payments. The budget also linked requested spending increases to the themes laid out in the initiative. The themes were derived from a subset of its 19 objectives identified in the IRS 2014-2017 Strategic Plan. In addition to the future state themes and strategic objectives, IRS has identified enterprise goals to guide the IRS toward the future state, but as of May 2016, these goals were still under development. We acknowledge the steps IRS has taken and will continue to monitor its progress as the process is further developed.

    Recommendation: As a result of turnover in IRS's Senior Executive Team and in order to enhance budget planning and improve decision making and accountability, the Commissioner of Internal Revenue should develop a long-term strategy to address operations amidst an uncertain budget environment. As part of the strategy, IRS should take steps to improve its efficiency, including (1) reexamining programs, related processes, and organizational structures to determine whether they are effectively and efficiently achieving the IRS mission, and (2) streamlining or consolidating management or operational processes and functions to make them more cost-effective.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: While IRS agreed that having actual ROI data for implemented initiatives would be useful, it did not believe it is feasible to produce such estimates, as we recommended in June 2014. However, we maintain that IRS should be able to provide some information on past initiatives, such as whether funds requested were used in the manner originally proposed. As of July 2015, IRS officials reported there is no timeline for full implementation. In June 2016, IRS officials confirmed that they do not isolate the revenue attributable to a specific initiative, but pointed to other efforts to help manage IRS's budget, including establishing the Office of Planning Programming, and Audit Coordination intended to improve investment planning processes in the future. While these other efforts are intended to help IRS act more strategically, they are not directly linked to ROI. IRS's Research, Analysis, and Statistics Division has begun to estimate marginal direct revenues and marginal costs attributable to specific compliance projects. The estimates are necessary inputs to establish a measure of ROI, which in turn can guide resource allocation decisions within the correspondence exam program. IRS plans to use these estimates to inform future examination plans as we recommended in June 2014, but considerable work remains in this long-term effort. In July 2015, IRS officials reported there is no timeline for full implementation. In June 2016, IRS officials confirmed that projected revenue will be considered in investment decision-making as part of fiscal year 2018 enterprise planning guidance, but did not report any progress in using actual ROI data.

    Recommendation: Because ROI provides insights on the productivity of a program and is one important factor in making resource allocation decisions, the Commissioner of Internal Revenue should calculate actual ROI for implemented initiatives, compare the actual ROI to projected ROI, and provide the comparison to budget decision makers for initiatives where IRS allocated resources.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: While IRS agreed that having actual ROI data for implemented initiatives would be useful, it did not believe it is feasible to produce such estimates, as we recommended in June 2014. However, we maintain that IRS should be able to provide some information on past initiatives, such as whether funds requested were used in the manner originally proposed. As of July 2015, IRS officials reported there is no timeline for full implementation. In June 2016, IRS officials confirmed that they do not isolate the revenue attributable to a specific initiative, but pointed to other efforts to help manage IRS's budget, including establishing the Office of Planning Programming, and Audit Coordination intended to improve investment planning processes in the future. While these other efforts are intended to help IRS act more strategically, they are not directly linked to ROI. IRS's Research, Analysis, and Statistics Division has begun to estimate marginal direct revenues and marginal costs attributable to specific compliance projects. The estimates are necessary inputs to establish a measure of ROI, which in turn can guide resource allocation decisions within the correspondence exam program. IRS plans to use these estimates to inform future examination plans as we recommended in June 2014, but considerable work remains in this long-term effort. In July 2015, IRS officials reported there is no timeline for full implementation. In June 2016, IRS officials confirmed that projected revenue will be considered in investment decision-making as part of fiscal year 2018 enterprise planning guidance, but did not report any progress in using actual ROI data.

    Recommendation: Because ROI provides insights on the productivity of a program and is one important factor in making resource allocation decisions, the Commissioner of Internal Revenue should use actual ROI calculations as part of resource allocation decisions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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