IRS Guidance on Economic Analyses in Investment Business Cases

GAO-02-234R Published: May 09, 2002. Publicly Released: May 09, 2002.
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Highlights

The Internal Revenue Service (IRS) plans to spend $2.9 billion to modernize its information systems. This report reviews the latest draft of IRS' Investment Decision Management Business Case Procedure, which guides the agency's information technology (IT) investments. GAO discusses changes to the guidance that would ensure that the economic analyses in IRS business cases are consistent with commonly accepted principles. IRS' draft guidance on business case documentation represents an important step toward ensuring that IRS management has relevant information on which to base its critical IT investment decisions. However, some aspects of IRS' guidance are inconsistent with commonly held principles of public sector cost-benefit analysis. Most important, the guidance does not require the computation of a comprehensive social net present value (NPV)--the standard for deciding whether a government investment can be justified on economic grounds. The two partial NPV computations that IRS' guidance requires are inappropriate because they do not incorporate the proper values for all relevant benefits and costs for investment projects with significant effects outside of IRS. In addition, IRS' two NPV's are not additive, so even if all benefits and costs were properly valued, decision makers would be unable to determine the overall net value of an investment.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service To ensure that economic analyses contained in IRS business cases provide a sound basis for managers' investment decisions, IRS business case guidance should require the use of a comprehensive social NPV as the basis for comparing the economic values of alternative investment projects that give rise to significant benefits or costs outside of IRS.
Closed – Implemented
In 2004, the Internal Revenue Service (IRS) updated its business case guidance and cost benefit analysis handbook to require the use of a comprehensive social net present value as the basis for comparing alternative investment projects.
Internal Revenue Service To ensure that economic analyses contained in IRS business cases provide a sound basis for managers' investment decisions, IRS business case guidance should provide detailed instructions to ensure that the NPV includes all measurable costs and benefits to society and does not include transfer payments at their face value, unless evidence is provided to support such a valuation.
Closed – Implemented
In 2004, the Internal Revenue Service (IRS) updated its business case guidance and cost benefit analysis handbook to include all measurable costs and benefits to society in its net present value calculations and to acknowledge that transfer payments should not be counted at face value.
Internal Revenue Service To ensure that economic analyses contained in IRS business cases provide a sound basis for managers' investment decisions, IRS business case guidance should require that the NPV be supplemented (in a separate section of the business case) by clear and comprehensive descriptions of all significant transfer payments and nonmeasurable benefits and costs that have not been included in the NPV computation.
Closed – Implemented
In 2004, the Internal Revenue Service (IRS) updated its business case guidance and cost benefit analysis handbook to allow for the inclusion of nonmeasurable costs and benefits to supplement its net present value calculations.
Internal Revenue Service To ensure that economic analyses contained in IRS business cases provide a sound basis for managers' investment decisions, IRS business case guidance should require business cases to include the supplementary analysis of excess burden, when appropriate, as recommended in Office of Management and Budget Circular A-94, Section 11.
Closed – Implemented
In 2004, the Internal Revenue Service (IRS) updated its business case guidance and cost benefit analysis handbook to require business cases to include analysis of excess burden according to Office of Management and Budget Circular No. A-94, section 11 guidance.

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