The budget cycle at the Internal Revenue Service (IRS) begins with estimates of the budget needed to operate its programs in a designated fiscal year. The IRS presents the budget proposal to the Department of the Treasury, the Office of Management and Budget, and the Congress.

The IRS finances most of its operations through the five annual appropriations that comprise its operating budget for the fiscal year. One of these five appropriations is the Information Systems (IS) Appropriation, which provides the resources to manage, maintain, and operate the information systems supporting Federal tax administration. The IRS’ business activities rely on these information systems to process tax and related documents, to account for tax revenues collected, to send out bills for taxes owed, and to issue refunds. The President’s Budget for the IS Appropriation is $1.45 billion for Fiscal Year (FY) 2000 and $1.58 billion for FY 2001.

In January 1998, the IRS undertook an ambitious program to modernize all aspects of the agency. The IRS refers to this whole process of change as "modernization." IS modernization plans include a multi-year transition to a shared services structure designed to improve services provided to internal and external customers. In addition to restructuring the IS organization, the IRS plans to move groups of employees working in other divisions who perform key computer support work, such as systems development, systems operations, network management, telecommunications, and desktop support, to IS before October 2000.

The overall objectives of this review were to determine whether the IRS’ transition plan adequately accounted for IS resources and whether the plan is sufficiently funded to achieve FYs 2000 and 2001 transition milestones.

In September 1998, IS appointed teams to plan the transition to a shared services structure. Their efforts resulted in detailed reports which contained blueprints for the IS organization and its new processes for FY 2000 and beyond. However, our review of IS transition planning determined that these teams did not adequately address transition initiatives in the IRS’ budget submissions.

If the IRS does not address transition-related budget requirements, the IS budget may result in a shortfall in funding for FY 2000. Also, limited funding to support the transition to the IS shared services structure may affect the IRS restructuring by not providing the business units all services expected.

Transition team efforts included detailed research on best practices and benefit information for shared services organizations. However, the teams included cost considerations for only one transition initiative. Transition teams did not develop business cases or consider costs for 23 of 24 transition-related initiatives. Also, the IRS transition planning process was not properly aligned with the budget cycle, and IS did not consider transition-related costs for inclusion in the budget formulation.

The absence of proper planning to provide sufficient transition funding has resulted in:

• An immediate shortfall of IS funds that must be addressed to avoid potential Antideficiency Act penalties.

• A potential inability to implement transition initiatives due to inadequate funding.

Because of an absence of cost consideration in transition planning, the budget submission to fund the IS organization’s transition initiatives understated IS needs by an estimated $2.5 and $9.8 million for FYs 2000 and 2001, respectively.

The CIO needs to provide direction ensuring inclusion of transition-related funding to allow the IS organization to reach its goal of operating in a shared services structure. To manage the potential FY 2000 budget shortfall, IS needs to ensure financial plan changes and inter-appropriation transfers are completed. For future transition planning, the CIO should coordinate with transition team executives to attempt to align planning efforts with budget cycle requirements.

Management's response was due on September 25, 2000, but was still in the process of being finalized as of the date of this report.